ASG Law

Tag: COA Disallowance

  • Government Employee Benefits: When Can the COA Demand a Refund?

    Understanding the Rules on Returning Disallowed Government Employee Benefits

    Omercaliph M. Tiblani, Criselle S. Sune, Maria Genelin L. Licos, Quintin Dwight G. De Luna, Marie Christine G. Danao and Other National Economic Development Authority Central Office Non-Managerial and/or Rank and File Employees Listed in Annex “A” [of the Petition] vs. Commission on Audit (COA), G.R. No. 263155, November 05, 2024

    Imagine receiving a bonus at work, only to be told years later that you have to return it. This is the reality faced by many government employees when the Commission on Audit (COA) disallows certain benefits. But when exactly can the COA demand a refund, and what recourse do employees have? This recent Supreme Court decision involving employees of the National Economic Development Authority (NEDA) sheds light on this complex issue.

    In this case, NEDA employees received a Cost Economy Measure Award (CEMA) from 2010 to 2012. Years later, the COA disallowed the CEMA and demanded that the employees return the money. The Supreme Court ultimately ruled that while the COA’s disallowance was correct, the employees were excused from returning the benefits under certain exceptions.

    The Legal Framework: Allowances, Incentives, and COA’s Authority

    Philippine law strictly regulates the use of government funds, especially regarding employee benefits. Several key provisions govern this area:

    • General Appropriations Act (GAA): The GAA for each fiscal year often includes restrictions on the use of government funds for allowances and benefits not specifically authorized by law.
    • Presidential Decree (PD) No. 1597: This decree requires presidential approval for additional allowances, honoraria, and other fringe benefits for government employees, upon recommendation by the Department of Budget and Management (DBM).
    • Civil Service Commission (CSC) Memorandum Circular No. 1, s. 2001: This circular establishes the Program on Awards and Incentives for Service Excellence (PRAISE) in the government, requiring agencies to establish their own employee suggestion and incentive awards systems. However, these systems must comply with existing laws and regulations on government spending.

    These legal provisions exist to ensure responsible use of taxpayer money and to prevent unauthorized or excessive benefits for government employees.

    The power of the COA to audit government spending and disallow illegal or irregular expenditures is rooted in the Constitution. This authority allows the COA to ensure accountability and transparency in the use of public funds.

    Example: If a government agency creates a new allowance for its employees without specific authorization from the GAA or presidential approval, the COA can disallow the expenditure and demand a refund.

    The NEDA Case: CEMA Disallowance and the Road to the Supreme Court

    The NEDA employees received CEMA under the agency’s Awards and Incentives System (NAIS), established pursuant to CSC guidelines. However, the COA disallowed the CEMA for several reasons:

    • Lack of legal basis: CEMA was not specifically authorized by law or the GAA.
    • Lack of presidential approval: NEDA did not obtain presidential approval for the CEMA, as required by PD No. 1597.
    • Insufficient standards: There were no clear and quantifiable standards for determining who was eligible for CEMA and how their contributions resulted in savings or extraordinary performance.

    The case went through several stages:

    1. Audit Observation Memorandum (AOM): The COA issued an AOM requiring the refund of the CEMA.
    2. Notice of Disallowance (ND): The COA issued an ND against the CEMA payments.
    3. Appeal to COA National Government Sector (NGS): The NEDA employees and officials appealed the ND, but the COA-NGS affirmed the disallowance, initially exempting employees.
    4. Automatic Review by COA Commission Proper (CP): The COA-CP affirmed the ND, reiterating the lack of legal basis and sufficient standards for the CEMA. It excused the employees.
    5. Motion for Reconsideration (MR): The NEDA officials filed an MR, which the COA-CP partly granted, excusing the officers, but reinstating the liability of the employees.
    6. Petition to the Supreme Court: The NEDA employees then elevated the case to the Supreme Court.

    The Supreme Court acknowledged the COA’s disallowance was correct, as the CEMA lacked a proper legal basis and presidential approval. However, the Court focused on whether the employees should be required to return the money they had received.

    The Supreme Court cited Madera v. Commission on Audit, which provides the rules on the civil liability of recipients of disallowed amounts.

    The Takeaway: While the COA’s decision to disallow the CEMA was upheld, the Supreme Court ultimately sided with the employees, stating:

    “[T]he Court finds that there are exceptional circumstances in this case that warrant excusing petitioners from the liability to refund the amounts they respectively received.”

    “[T]o insist on returning the CEMA would send a message to government employees that their productivity and efforts are not valued and would effectively be penalized years after the fact.”

    Practical Implications: When Can Employees Be Excused from Refunds?

    The Supreme Court emphasized that requiring refunds should be the exception rather than the rule. It laid out several factors to consider when determining whether to excuse the return of disallowed amounts:

    • The nature and purpose of the disallowed allowances and benefits.
    • The lapse of time between the receipt of the allowances and benefits and the issuance of the notice of disallowance.
    • Whether the employees acted in good faith and relied on the actions of their superiors.
    • Whether requiring a refund would cause undue prejudice or create an unjust situation.

    In the NEDA case, the Court considered the following:

    • More than 10 years had passed since the employees received the CEMA.
    • The employees had likely already spent the money on their families’ needs.
    • The employees were rank-and-file employees who relied on the actions of their superiors.
    • NEDA achieved excellent results during the years in question, at least in part due to the performance of its personnel.

    Key Lessons:

    • Government employees should be aware that benefits received may be subject to disallowance by the COA.
    • Even if a benefit is disallowed, employees may be excused from returning the money if certain conditions are met.
    • The Supreme Court will consider the specific circumstances of each case when determining whether to require a refund.

    Hypothetical Example: A government agency provides its employees with a rice subsidy, which is later disallowed by the COA. If the employees received the subsidy in good faith and a significant amount of time has passed, the Court may excuse them from returning the money, especially if they are low-income earners.

    Frequently Asked Questions (FAQ)

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

    A: A Notice of Disallowance is a written notice issued by the COA informing a government agency or official that certain expenditures have been disallowed due to legal or procedural deficiencies.

    Q: What should I do if I receive a Notice of Disallowance?

    A: Consult with a lawyer immediately to understand your rights and options. You may be able to appeal the disallowance or argue that you should be excused from returning the money.

    Q: What does “good faith” mean in the context of COA disallowances?

    A: Good faith generally means that you acted honestly and reasonably, without knowledge of any wrongdoing or irregularity. If you relied on the actions of your superiors and had no reason to believe that the benefit was illegal, you may be considered to have acted in good faith.

    Q: What is solutio indebiti?

    A: Solutio indebiti is a legal principle that arises when someone receives something without a right to demand it, creating an obligation to return it. This principle is often cited in COA cases to justify requiring the return of disallowed amounts.

    Q: How long does the COA have to issue a Notice of Disallowance?

    A: The Supreme Court has considered the lapse of time between the receipt of the allowances and benefits and the issuance of the notice of disallowance or any similar notice indicating its possible illegality or irregularity in excusing recipients from making a refund.

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

  • When Can Government Transactions Be Disallowed? Understanding COA’s Power

    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.

  • PhilHealth Disallowances: Understanding Fiscal Autonomy Limits and Liability for Benefits Granted to Contractors

    Limits to PhilHealth’s Fiscal Autonomy: Accountability for Improperly Granted Benefits

    G.R. No. 249061, May 21, 2024

    Imagine a government corporation freely dispensing bonuses and allowances, regardless of established rules. This scenario highlights the need for checks and balances, even with fiscal autonomy. In a recent case, the Supreme Court clarified the limits of the Philippine Health Insurance Corporation’s (PhilHealth) power to grant benefits, particularly to job order and project-based contractors. This ruling underscores the importance of adhering to government regulations and the potential liability of approving officers for disallowed disbursements.

    This case revolves around the Commission on Audit’s (COA) disallowance of various benefits and allowances granted by PhilHealth Regional Office No. V (ROV) to its job order and project-based contractors. These benefits, totaling PHP 4,146,213.85, were deemed to lack legal basis. The key question is whether PhilHealth’s claim of fiscal autonomy shields it from these disallowances and whether approving officers can be held liable for the improperly granted benefits.

    Understanding the Legal Framework

    Several legal principles and regulations govern the grant of benefits and allowances in government-owned and controlled corporations (GOCCs) like PhilHealth. While Republic Act No. 7875, or the National Health Insurance Act of 1995, grants PhilHealth certain powers, including the authority to fix the compensation of its personnel, this power is not absolute.

    The Supreme Court has consistently held that PhilHealth’s fiscal autonomy is limited by:

    • The Salary Standardization Law (Republic Act No. 6758)
    • Presidential Decree No. 1597, requiring presidential approval for certain allowances
    • Department of Budget and Management (DBM) regulations
    • Civil Service Commission (CSC) rules

    Crucially, CSC Memorandum Circular No. 40, Series of 1998, explicitly states that job order and contract of service employees are not entitled to the same benefits as regular government employees. This includes allowances like PERA, COLA, and RATA. The Court emphasized this principle, stating that “contract of service or job order employees do not enjoy the benefits enjoyed by government employees”.

    For example, imagine a government agency giving Christmas bonuses to its contractual janitorial staff. While well-intentioned, this would violate CSC rules and be subject to disallowance.

    The Case Unfolds: COA’s Disallowance and PhilHealth’s Appeal

    Between 2009 and 2011, PhilHealth ROV provided various benefits to its job order and project-based contractors, including transportation allowances, sustenance gifts, and productivity enhancement incentives. The COA subsequently disallowed these payments, issuing 19 Notices of Disallowance (NDs). Here’s a simplified overview:

    • 2009-2011: PhilHealth ROV grants benefits to contractors.
    • COA Audit: The Audit Team Leader and Supervising Auditor of PhilHealth ROV disallowed the payment of benefits
    • NDs Issued: COA issues 19 NDs totaling PHP 4,146,213.85.
    • PhilHealth Appeal: PhilHealth argues fiscal autonomy and good faith.
    • COA ROV Decision: Affirms the disallowances, citing lack of legal basis.
    • COA CP Decision: Partially grants the appeal, absolving the contractors (payees) from liability but holding the approving officers solidarily liable.

    PhilHealth then appealed to the Supreme Court, arguing that the COA committed grave abuse of discretion. The Court was asked to determine if PhilHealth’s fiscal autonomy justified the granting of the benefits and if the approving officers acted within their authority.

    The COA CP, in its decision, emphasized that “the corporate powers of PhilHealth to determine the compensation of its officers and employees are limited by law, the policies of the Office of the President (OP) and the Department of Budget and Management (DBM).”

    The Supreme Court noted that a post facto request for approval from the Office of the President (OP) did not validate the illegal disbursements to non-employees. Even with presidential approval, the disbursement of the disallowed benefits and incentives in favor of the job order and project-based contractors will remain legally infirm.

    Practical Implications and Key Takeaways

    This case serves as a crucial reminder to GOCCs about the limits of their fiscal autonomy. It emphasizes that while they may have the power to fix compensation, they must still adhere to existing laws, rules, and regulations.

    The ruling also clarifies the liability of approving officers in cases of disallowed disbursements. Approving officers can be held solidarily liable for illegal and irregular disbursements, especially when they demonstrate gross negligence or disregard for established rules.

    Key Lessons

    • Fiscal Autonomy is Not Absolute: GOCCs must operate within the bounds of the law.
    • Compliance is Crucial: Adhere to CSC rules and DBM regulations regarding benefits.
    • Due Diligence is Required: Approving officers must ensure disbursements have a legal basis.
    • Good Faith Alone is Not Enough: Gross negligence can still lead to liability.

    Let’s say a GOCC approves a new allowance for its employees without consulting DBM guidelines. Even if the GOCC believes the allowance is justified, it could face disallowance and potential liability for its approving officers.

    Frequently Asked Questions

    Q: What is fiscal autonomy?

    A: Fiscal autonomy grants government entities the power to manage their own finances, including budgeting and spending. However, this power is not unlimited and is subject to legal restrictions.

    Q: What are the consequences of a COA disallowance?

    A: A COA disallowance means that certain government expenditures are deemed illegal or irregular. This can lead to the return of the disallowed amounts and potential administrative or criminal charges for responsible officers.

    Q: Who is liable to return disallowed amounts?

    A: Generally, approving and certifying officers who acted in bad faith or with gross negligence are solidarily liable. Recipients may also be required to return amounts they received without a valid legal basis. In this case the payees were absolved and only the approving officers were held liable.

    Q: What is the role of good faith in disallowance cases?

    A: Good faith can be a mitigating factor for approving and certifying officers. If they acted in good faith and with due diligence, they may not be held personally liable. However, good faith is not a defense against gross negligence.

    Q: How does this ruling affect GOCCs moving forward?

    A: This ruling reinforces the need for GOCCs to carefully review their compensation and benefits policies to ensure compliance with all applicable laws and regulations. It also highlights the importance of seeking guidance from the DBM and CSC when in doubt.

    Q: What is the effect of a post-facto presidential approval on an otherwise illegal disbursement?

    A: The Supreme Court held that a post facto request for approval from the Office of the President (OP) did not validate the illegal disbursements to non-employees. Even with presidential approval, the disbursement of the disallowed benefits and incentives in favor of the job order and project-based contractors will remain legally infirm.

    Q: What does it mean when the Supreme Court says approving officers are solidarily liable as to the “net disallowed amounts only?”

    A: It means that the approving officers are only liable for the total amount disallowed, MINUS any amounts that the payees (recipients) are excused from returning.

    ASG Law specializes in government contracts and regulatory compliance. Contact us or email hello@asglawpartners.com to schedule a consultation.

  • COA Disallowances: When are Government Officials Personally Liable to Refund?

    Understanding Liability for COA Disallowances: The Favila Case

    G.R. No. 251824, April 11, 2024

    Imagine a scenario where a government official, acting in what they believe is good faith, receives benefits approved by a board resolution. Later, the Commission on Audit (COA) disallows these benefits. Is the official personally liable to return the money? This question often arises in government service, highlighting the tension between public service, good faith, and accountability. The Supreme Court’s resolution in Peter B. Favila vs. Commission on Audit sheds light on this issue, specifically addressing the extent of liability for disallowed benefits received by government officials.

    Navigating the Legal Landscape of COA Disallowances

    COA disallowances are rooted in the fundamental principle that public funds must be spent prudently and in accordance with the law. Article IX-B, Section 8 of the 1987 Constitution explicitly prohibits public officials from receiving additional, double, or indirect compensation unless specifically authorized by law. This provision aims to prevent abuse and ensure transparency in government spending.

    The legal framework governing COA disallowances is further shaped by the Administrative Code of 1987, particularly Sections 38 and 43. Section 38 protects approving and certifying officers who act in good faith, in the regular performance of their official functions, and with the diligence of a good father of a family. However, Section 43 holds officers who act in bad faith, with malice, or gross negligence solidarily liable for the disallowed amounts.

    A crucial concept in this area is solutio indebiti, a principle of civil law that dictates that if someone receives something they are not entitled to, they have an obligation to return it. This principle, coupled with the concept of unjust enrichment, forms the basis for requiring recipients of disallowed funds to return the amounts they received.

    The Supreme Court’s landmark ruling in Madera v. Commission on Audit (882 Phil. 744 [2020]) established crucial guidelines regarding the return of disallowed amounts. The Madera ruling differentiates between the liability of approving/certifying officers and mere recipients. Recipients, even those acting in good faith, are generally liable to return the disallowed amounts they received, unless they can demonstrate that the amounts were genuinely given in consideration of services rendered or where undue prejudice or social justice considerations exist.

    In Abellanosa v. Commission on Audit (890 Phil. 413 [2020]), the Supreme Court further clarified the exceptions to the return requirement for payees. To be excused from returning disallowed amounts, the following conditions must be met: (a) the incentive or benefit has a proper legal basis but is disallowed due to mere procedural irregularities; and (b) the incentive or benefit has a clear, direct, and reasonable connection to the actual performance of the recipient’s official work and functions.

    For instance, if a government employee receives an allowance that is disallowed due to a minor paperwork error, and the allowance is directly tied to their job performance, they might be excused from returning the amount. However, if the allowance lacks a legal basis or is not related to their work, they will likely be required to return it.

    The Favila Case: A Detailed Look

    Peter B. Favila, while serving as Secretary of the Department of Trade and Industry (DTI), was an ex-officio member of the Board of Directors (BOD) of the Trade and Investment Development Corporation of the Philippines (TIDCORP). From 2005 to 2007, TIDCORP’s BOD approved resolutions granting various benefits to its members, including productivity enhancement pay and bonuses.

    In 2012, the COA issued a Notice of Disallowance (ND) disallowing these benefits, totaling PHP 4,539,835.02, on the grounds that they constituted double compensation prohibited under the Constitution. Favila, who received PHP 454,598.28 in benefits between 2008 and 2010, was held liable.

    Favila contested the disallowance, arguing that the benefits were granted in good faith pursuant to duly issued Board Resolutions and the TIDCORP Charter, also claiming a violation of his right to due process. The COA Proper denied his petition, prompting him to elevate the case to the Supreme Court.

    The Supreme Court initially dismissed Favila’s petition, affirming the COA’s decision holding him solidarily liable for the entire disallowed amount, relying on Suratos vs. Commission on Audit where similar benefits were disallowed. He then filed a Motion for Reconsideration, arguing that he was neither an approving officer nor did he participate in the approval of the Board Resolutions.

    Upon reconsideration, the Supreme Court modified its ruling, recognizing that Favila was not involved in the approval of the disallowed benefits. The Court then applied the Madera rules, holding him liable only as a recipient of the disallowed amounts, responsible for returning what he personally received. The Court emphasized that:

    Recipients – whether approving or certifying officers or mere passive recipients – are liable to return the disallowed amounts respectively received by them, unless they are able to show that the amounts they received were genuinely given in consideration of services rendered.

    However, the Court found that the benefits lacked legal basis and were not genuinely given as compensation for services rendered. Additionally, no circumstances warranted excusing Favila from the return requirement based on undue prejudice or social justice considerations.

    In sum, Favila is held civilly liable not in his capacity as an approving/authorizing officer, but merely as a payee-recipient who in good faith received a portion of the disallowed amount. His receipt of the foregoing benefits to which he was not legally entitled, gave rise to an obligation on his part to return the said amounts under the principle of solutio indebiti.

    Therefore, the Supreme Court directed Favila to settle only the amount he actually received, PHP 454,598.28.

    Key Takeaways for Public Officials

    The Favila case reinforces the importance of understanding personal liability in COA disallowance cases. While good faith is a factor, it does not automatically absolve recipients of liability. Here are the key lessons:

    • Liability as Approving Officer vs. Recipient: Approving/certifying officers can be held liable for the entire disallowed amount if they acted in bad faith, with malice, or with gross negligence. Recipients, on the other hand, are generally liable only for the amounts they personally received.
    • The Importance of Legal Basis: Benefits and allowances must have a clear legal basis. Reliance on board resolutions alone is not sufficient if the resolutions are not authorized by law.
    • Burden of Proof: Recipients have the burden of proving that the disallowed amounts were genuinely given in consideration of services rendered or that equitable considerations justify excusing the return.

    Frequently Asked Questions

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

    A: A Notice of Disallowance is a written notice issued by the COA when it finds that a government transaction is illegal, irregular, unnecessary, excessive, extravagant, or unconscionable.

    Q: What does it mean to be ‘solidarily liable’?

    A: Solidary liability means that each person held liable is responsible for the entire amount. The COA can choose to collect the entire amount from any one of the individuals held solidarily liable.

    Q: What is the ‘good faith’ defense in COA cases?

    A: The ‘good faith’ defense applies to approving and certifying officers who acted in the regular performance of their duties, with the diligence of a good father of a family, and without any knowledge of the illegality of the transaction. However, good faith alone may not excuse a recipient from returning disallowed amounts.

    Q: What is solutio indebiti?

    A: Solutio indebiti is a legal principle that arises when someone receives something they are not entitled to, creating an obligation to return it to the rightful owner.

    Q: What should I do if I receive a Notice of Disallowance?

    A: If you receive an ND, it’s crucial to seek legal advice immediately. You should gather all relevant documents and evidence to support your case and file a timely appeal with the COA.

    Q: Can I be held liable for disallowed amounts even if I didn’t know the transaction was illegal?

    A: Yes, as a recipient, you can be held liable to return the amounts you received, even if you acted in good faith. The burden is on you to prove you are excused from returning the money under specific exceptions.

    ASG Law specializes in government contracts and procurement, and COA litigation. Contact us or email hello@asglawpartners.com to schedule a consultation.

  • Accountant Liability: When Good Faith Protects Against Disallowed Funds

    Good Faith Protects Certifying Officers from Liability for Disallowed Funds

    G.R. No. 245894, July 11, 2023

    Imagine a local government accountant, diligently performing her duties, only to be held personally liable for millions of pesos in disallowed funds. This is the reality many public servants face. But when does good faith shield them from financial responsibility? In Melloria vs. Jimenez, the Supreme Court clarified the extent to which certifying officers can be held liable for disallowed disbursements, offering a crucial layer of protection for those acting in good faith and within the scope of their ministerial duties. This case underscores the importance of understanding the nuances of public accountability and the limits of personal liability for government employees.

    Understanding the Legal Framework for Public Fund Disbursements

    Philippine law holds public officials accountable for the proper use of government funds. The 1987 Administrative Code and the Government Auditing Code (Presidential Decree No. 1445) are the cornerstones of this accountability. These laws aim to prevent corruption and ensure that public resources are used efficiently and legally.

    Sections 102 and 103 of Presidential Decree No. 1445 explicitly state that officials are responsible for government funds and property. Any unlawful expenditure results in personal liability for the responsible official or employee. However, this is balanced by Sections 38 and 39 of the 1987 Administrative Code, which protect subordinate officers acting in good faith. Critically, Section 38 states that “A public officer shall not be civilly liable for acts done in the performance of his official duties, unless there is a clear showing of bad faith, malice or gross negligence.”

    DILG Memorandum Circular No. 99-65 sets limits on intelligence and confidential funds for local governments. Item II.2 states: “the total annual amount appropriated for Intelligence or Confidential undertakings shall not exceed thirty percent (30%) of the total annual amount allocated for peace and order efforts or three percent (3%) of the total annual appropriations whichever is lower.” This provision aims to prevent excessive spending on confidential activities and ensure that such funds are properly managed.

    For example, imagine a municipality with a total annual budget of PHP 100 million and a peace and order budget of PHP 10 million. Under DILG MC No. 99-65, the maximum amount that can be allocated for intelligence and confidential funds is PHP 3 million (3% of the total budget) or PHP 3 million (30% of the peace and order budget), whichever is lower. Thus, the limit would be PHP 3 million.

    The Case of Melloria vs. Jimenez: A Detailed Breakdown

    In 2011, the Municipality of Laak, Compostela Valley, allocated PHP 18,093,705.00 for its peace and order programs. Mayor Reynaldo Navarro authorized cash advances of PHP 4,100,000.00 for intelligence and confidential activities. The Commission on Audit (COA) flagged this, arguing that it exceeded the allowable limit under DILG MC No. 99-65. COA issued Notice of Disallowance (ND) No. 2014-12-0013, disallowing PHP 2,600,000.00.

    The COA determined that the maximum allowable budget for intelligence and confidential activities was only PHP 1,500,000.00. This was based on 30% of the municipality’s peace and order budget after deducting funds allocated for human rights advocacy and community development programs, which COA did not consider part of “peace and order efforts.”

    Those held solidarily liable included Mayor Navarro, Municipal Budget Officer Sonia Quejadas, Municipal Accountant Raquel Melloria, and Municipal Treasurer Eduarda Casador. Melloria and Casador, in their roles as certifying officers, appealed the COA’s decision, arguing that they acted in good faith.

    The case journeyed through the following steps:

    • COA’s Intelligence/Confidential Funds Audit Unit (ICFAU) issued ND No. 2014-12-0013, disallowing PHP 2,600,000.00.
    • Petitioners appealed to the COA Proper, which affirmed the disallowance in Decision No. 2018-007.
    • Petitioners moved for reconsideration, but the COA denied this in Resolution No. 2019-008.
    • Petitioners elevated the case to the Supreme Court.

    The Supreme Court ultimately ruled in favor of Melloria and Casador, stating, “Certifying officers who were merely performing ministerial duties not related to the legality or illegality of the disbursement may be excused from the liability to return the disallowed amounts on account of good faith.” The Court emphasized that the accountant and treasurer were merely attesting to the availability of funds and the obligation of the allotment, functions that did not involve discretionary decision-making regarding the legality of the expenditure.

    The Supreme Court cited Madera v. Commission on Audit, clarifying that “approving and certifying officers who acted in good faith, in regular performance of official functions, and with the diligence of a good father of the family are not civilly liable to return consistent with Section 38 of the Administrative Code of 1987.”

    As the Court stated, “Being mere certifying officers, petitioners do not appear to have a hand in deciding the upper limit of the intelligence and confidential funds or which activities could be charged against the intelligence and confidential funds…”.

    Practical Implications for Public Officials

    This case provides significant relief for certifying officers in local governments. It clarifies that good faith and the performance of ministerial duties can shield them from personal liability for disallowed funds. However, it also underscores the importance of understanding the limits of intelligence and confidential funds and the need for clear documentation.

    Local government units should ensure that all expenditures, especially those related to intelligence and confidential funds, are properly documented and aligned with relevant regulations. Certifying officers should diligently perform their duties, but they are not expected to be experts in interpreting complex legal provisions. The primary responsibility for ensuring the legality of disbursements lies with the approving authority, typically the local chief executive.

    Key Lessons

    • Certifying officers acting in good faith and performing ministerial duties are generally protected from personal liability.
    • Local governments must adhere to the limits on intelligence and confidential funds set by DILG MC No. 99-65.
    • Clear documentation and proper allocation of funds are crucial to avoid disallowances.

    Frequently Asked Questions

    Q: What is considered a ministerial duty?

    A: A ministerial duty is one that requires no exercise of discretion or judgment. It is a duty that must be performed in a prescribed manner based on a given set of facts.

    Q: What constitutes good faith in the context of public fund disbursements?

    A: Good faith implies honesty of intention and a lack of knowledge of circumstances that would put a reasonable person on inquiry. It means acting without any intention to take unconscientious advantage, even if there are technicalities in the law.

    Q: How does DILG MC No. 99-65 limit intelligence and confidential funds?

    A: It limits the total annual amount appropriated for intelligence or confidential undertakings to 30% of the total annual amount allocated for peace and order efforts or 3% of the total annual appropriations, whichever is lower.

    Q: What happens if a disbursement is disallowed by the COA?

    A: If a disbursement is disallowed, the individuals responsible for the illegal expenditure may be held personally liable to return the funds, unless they can prove they acted in good faith and within the scope of their duties.

    Q: What should local government units do to avoid disallowances?

    A: Local government units should ensure that all expenditures are properly documented, comply with relevant regulations, and are aligned with the intended purpose of the funds.

    Q: Can a certifying officer be held liable if they rely on the advice of a superior?

    A: While reliance on a superior’s advice can be a factor in determining good faith, it does not automatically absolve a certifying officer of liability. The officer must still exercise due diligence and ensure that the disbursement is lawful.

    ASG Law specializes in government contracts and regulatory compliance. Contact us or email hello@asglawpartners.com to schedule a consultation.

  • Per Diem vs. Honoraria: Defining Compensation Limits for Government Board Members

    The Supreme Court has ruled that government officials cannot receive additional compensation in the form of honoraria if they are already receiving a per diem allowance, as this would violate established laws and regulations. This decision clarifies the boundaries of permissible compensation for members of government boards, emphasizing adherence to prescribed limits and preventing unauthorized financial benefits. It reinforces the importance of transparency and accountability in public service, ensuring that government funds are used appropriately and in accordance with legal provisions.

    ICAB’s Extra Pay: Was Reviewing Adoption Files Beyond the Call of Duty?

    This case revolves around the Inter-Country Adoption Board (ICAB), the central authority in the Philippines for inter-country adoptions. In this case, Bernadette Lourdes B. Abejo, the Executive Director of the ICAB, challenged the Commission on Audit’s (COA) disallowance of additional remuneration paid to ICAB members. The COA disallowed the payments, arguing they lacked legal basis and violated existing regulations. The core legal question is whether ICAB members, who already receive a per diem, could also be paid honoraria for reviewing prospective adoptive parents’ (PAPs) dossiers, a task they undertook to address a heavy workload. The Supreme Court was asked to determine if this additional compensation was justified or if it ran afoul of the laws governing compensation for government officials.

    The ICAB was created under Republic Act No. 8043 (RA 8043), also known as the “Inter-Country Adoption Act of 1995.” Its members include the Secretary of the Department of Social Welfare and Development (DSWD) as ex-officio Chairman, along with six other members appointed by the President. An Inter-Country Adoption Placement Committee (ICPC) operates under the Board’s direction, managing the selection and matching of applicants and children. From 2008 to 2010, the ICAB experienced a surge in applications, prompting its members to assist the ICPC with reviewing PAPs Dossiers. In response to this increased workload, Undersecretary Luwalhati F. Pablo authorized additional remuneration for ICAB members: P250.00 for each reviewed application, later increased to P500.00.

    However, after an audit, the COA issued a Notice of Disallowance (ND) for P162,855.00, citing the lack of legal basis, conflict with Department of Budget and Management (DBM) Budget Circular (BC) No. 2003-5, and Section 49 of RA 9970. The COA also pointed out that the DSWD Legal Service had denied the grant of honoraria to ICAB members and that Section 5 of RA 8043 limited compensation to a per diem of P1,500.00 per meeting. Abejo, as the Executive Director and approving officer, was identified as liable for the disallowed amount. The COA Proper affirmed the disallowance, stating that the additional remuneration violated Section 5 of RA 8043 and DBM BC No. 2003-5, which prohibits honoraria for those already receiving per diem.

    A key procedural point arose: Abejo did not file a motion for reconsideration of the COA Proper’s decision before filing a certiorari petition with the Supreme Court. Generally, failure to move for reconsideration is fatal to a certiorari petition because it deprives the tribunal of the opportunity to correct its errors. However, the Supreme Court recognized an exception: when the issues raised in the certiorari proceedings have already been addressed by the lower court. Because Abejo raised the same issues before the COA Proper, the Court proceeded to resolve the petition on its merits.

    The Supreme Court emphasized that while government employees may be compensated for work outside their regular functions, such compensation must comply with applicable laws and rules. The Court quoted Sison v. Tablang, which states that while honoraria are given in appreciation for services, their payment must be circumscribed by the DBM’s rules and guidelines. In this case, RA 8043 and DBM BC No. 2003-5 prevented the ICAB members from receiving additional compensation. Section 5 of RA 8043 limits the per diem ICAB members can receive, and Item 4.3 of DBM BC 2003-5 prohibits honoraria for officers already receiving per diem.

    The Court rejected the argument that the Intercountry Adoption Board Manual of Operation authorized the honoraria because Section 5 of the manual applied only to members of the ICPC, not the ICAB. Further, the manual itself was subordinate to express provisions of law and auditing rules. It states: “A Committee member shall receive an honorarium which shall be determined by the Board subject to usual accounting and auditing rules and regulations.” The Court also dismissed the claim that the ICAB members’ work constituted a “special project” compensable under Section 49 of RA 9970. To qualify as a special project, the undertaking must be a duly authorized inter-office or intra-office endeavor outside the regular functions of the agency, reform-oriented or developmental in nature, and contributory to improved service delivery.

    In Ngalob v. Commission on Audit, the Supreme Court laid out specific requirements for a “special project,” including an approved project plan with defined objectives, outputs, timelines, and cost estimates. Abejo failed to demonstrate any approved special project plan, leaving the Court without a basis to determine if the ICAB members’ dossier review qualified as such.

    Paragraph 4.3 of DBM Circular No. 2007-2 is explicit in requiring that a special project plan should be “prepared in consultation with all personnel assigned to a project and approved by the department/agency/lead agency head,” containing the following:

    • title of the project;
    • objectives of the project, including the benefits to be derived therefrom;
    • outputs or deliverables per project component;
    • project timetable;
    • skills and expertise required;
    • personnel assigned to the project and the duties and responsibilities of each;
    • expected deliverables per personnel assigned to the project per project component at specified timeframes; and
    • cost by project component, including the estimated cost for honoraria for each personnel based on man-hours to be spent in the project beyond the regular work hours; personnel efficiency should be a prime consideration in determining the man-hours required.

    Despite upholding the disallowance, the Supreme Court absolved Abejo from liability to return the disallowed amount. The Court applied the Madera v. Commission on Audit rules, which provide that approving and certifying officers are not civilly liable if they acted in good faith, in the regular performance of official functions, and with the diligence of a good father of the family. The Madera ruling provides a definitive set of rules in determining the liability of government officers and employees:

    Approving and certifying officers who acted in good faith, in regular performance of official functions, and with the diligence of a good father of the family are not civilly liable to return consistent with Section 38 of the Administrative Code of 1987.

    The Court found that Abejo had acted in good faith because there was no prior disallowance of the same benefit against ICAB, and no precedent disallowing a similar case in jurisprudence. This decision underscores the importance of adhering to compensation limits for government officials, while also protecting those who act in good faith from personal liability. Lastly, the Court noted that the individual ICAB members who received the additional remuneration were not held liable in the ND, and this determination had already attained finality. The Court stated, “To disturb their exoneration is to violate the doctrine of immutability of final orders or judgments.”

    FAQs

    What was the key issue in this case? The key issue was whether members of the Inter-Country Adoption Board (ICAB), who already received a per diem, could also be paid honoraria for reviewing applications, and whether the Executive Director could be held liable for the disallowed amounts.
    What is a per diem? A per diem is a daily allowance given to government officials to cover expenses incurred while performing official duties, such as attending meetings. It is meant to cover costs like transportation, meals, and lodging.
    What are honoraria? Honoraria are payments given as a token of appreciation for services rendered, typically for special or additional tasks. They are not considered a salary but rather a voluntary donation in consideration of services.
    Why did the COA disallow the additional remuneration? The COA disallowed the payments because they lacked legal basis, conflicted with Department of Budget and Management (DBM) Budget Circular No. 2003-5, and violated Section 5 of RA 8043, which limits compensation to a per diem.
    What is the significance of DBM Budget Circular No. 2003-5? DBM Budget Circular No. 2003-5 provides guidelines on the payment of honoraria and stipulates that individuals already receiving a per diem are not eligible to receive honoraria for the same services.
    What did the Supreme Court rule regarding the disallowance? The Supreme Court affirmed the COA’s decision, ruling that the additional remuneration was correctly disallowed because it violated RA 8043 and DBM BC No. 2003-5. The Court emphasized that the existing laws prevent the ICAB member from receiving additional compensation for the work they have done reviewing the PAPs Dossiers.
    Why was the Executive Director absolved from liability? The Executive Director, Bernadette Lourdes B. Abejo, was absolved from liability because the Court found that she had acted in good faith, with no prior disallowance of the same benefit and no precedent disallowing a similar case in jurisprudence.
    What are the Madera Rules mentioned in the decision? The Madera Rules, established in Madera v. Commission on Audit, provide a framework for determining the liability of government officers and employees in cases of disallowed benefits. They specify that those who act in good faith and with due diligence are not held civilly liable.
    What was the Court’s ruling about the ICAB members who received the money? The individual ICAB members who received the additional remuneration were not held liable in the ND, and this determination had already attained finality. To disturb their exoneration is to violate the doctrine of immutability of final orders or judgments

    This case clarifies the importance of adhering to prescribed compensation limits for government officials. While acknowledging that additional responsibilities may warrant additional compensation, the ruling emphasizes that such compensation must be within the bounds of existing laws and regulations. The absolution of the Executive Director from personal liability underscores the protection afforded to public officials who act in good faith, even when errors in judgment occur.

    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: BERNADETTE LOURDES B. ABEJO VS. COMMISSION ON AUDIT, G.R. No. 251967, June 14, 2022

  • Understanding the Legality of Separation Pay Calculations in Government Agencies: Insights from Recent Supreme Court Rulings

    Key Takeaway: The Supreme Court Clarifies the Legality of Rounding Off Service Length for Separation Pay in Government Agencies

    National Transmission Corporation (TransCo) v. Commission on Audit (COA), G.R. No. 246173, June 22, 2021

    Imagine a dedicated government employee, after years of service, being separated from their job due to organizational changes. They expect a fair separation package to help them transition into the next phase of their life. However, what if the calculation of their separation pay, which includes rounding off their length of service, turns out to be illegal? This was the situation faced by employees of the National Transmission Corporation (TransCo) when the Commission on Audit (COA) disallowed certain payments. The central legal question in this case was whether the rounding off of the length of service to calculate separation pay was legally permissible under existing laws and regulations.

    The National Transmission Corporation (TransCo) was created under the Electric Power Industry Reform Act of 2001 (EPIRA) to handle the transmission functions of the National Power Corporation (NPC). As part of its privatization, TransCo entered into a concession contract with the National Grid Corporation of the Philippines (NGCP), leading to the separation of many employees. These employees were granted separation pay based on a formula that included rounding off their length of service. However, the COA disallowed certain payments, arguing that the rounding-off method lacked legal basis.

    Legal Context: Understanding Separation Pay and Rounding Off

    Separation pay is a benefit provided to employees who are terminated or separated from service due to reasons beyond their control, such as organizational restructuring. For government employees, the terms and conditions of such benefits are governed by specific laws and regulations, including the Civil Service Law and the charters of government-owned and controlled corporations (GOCCs).

    The EPIRA, under Section 63, stipulates that displaced employees are entitled to separation pay equivalent to one and one-half month’s salary for every year of service. Additionally, Section 13 of Republic Act No. 9511 allows the TransCo Board of Directors to provide additional benefits to its employees, subject to certain limitations.

    However, the key issue in this case was the method of rounding off the length of service. While the Labor Code allows for rounding off in certain private sector retirement scenarios, this practice is not explicitly sanctioned for government employees under the EPIRA or related regulations. The Supreme Court had previously ruled in similar cases that such rounding off, without presidential approval, was illegal.

    To illustrate, consider an employee with 5 years and 7 months of service. If the rounding-off method were applied, their service would be considered 6 years, potentially increasing their separation pay. The legal question is whether this practice is permissible under the governing laws for government employees.

    Case Breakdown: The Journey of TransCo’s Appeal

    The story of TransCo’s appeal began when the COA issued several Notices of Disallowance (ND) against the separation pay granted to its employees. These disallowances were based on two main grounds: payments to contractual employees and the rounding off of the length of service, which resulted in an undue increase in separation pay.

    TransCo appealed these disallowances, arguing that their Board of Directors had the authority to grant additional benefits, including the rounding-off method. The COA Corporate Government Sector (CGS)-Cluster 3 Director initially partially granted the appeal, holding the Board of Directors and approving officers liable for the disallowed amounts, while exonerating the recipients on the grounds of good faith.

    Upon automatic review, the COA Proper affirmed the disallowances but modified the liability, absolving the recipients and most of the approving officers. TransCo then filed a petition for certiorari with the Supreme Court, challenging the disallowance of the excess separation pay resulting from the rounding-off method and the solidary liability of the approving officers.

    The Supreme Court’s ruling was based on several key points:

    • The Court reiterated that the rounding-off method, as applied by TransCo, was not supported by law. It emphasized that Section 64 of the EPIRA requires presidential approval for any increase in benefits, which TransCo failed to obtain.
    • The Court distinguished between the retirement benefits under the Labor Code, which allow for rounding off, and the separation pay under the EPIRA, which does not.
    • The Court found that the approving officers acted in good faith, relying on the Board’s resolutions, and thus absolved them from solidary liability for the disallowed amounts.

    Here are direct quotes from the Court’s reasoning:

    “The excess amounts of separation pay were properly disallowed for not being in accord with the EPIRA and its Implementing Rules and Regulations (IRR), RA 9511, and the applicable jurisprudence.”

    “Good faith has been defined in disallowance cases as: ‘that state of mind denoting honesty of intention, and freedom from knowledge of circumstances which ought to put the holder upon inquiry; an honest intention to abstain from taking any unconscientious advantage of another, even through technicalities of law, together with absence of all information, notice, or benefit or belief of facts which render transactions unconscientious.’”

    Practical Implications: What This Ruling Means for Government Agencies and Employees

    This Supreme Court ruling has significant implications for how government agencies calculate separation pay. Agencies must ensure that any additional benefits, including the method of calculating service length, are in strict compliance with existing laws and regulations. The requirement for presidential approval for any increase in benefits is a critical procedural step that must not be overlooked.

    For employees, this ruling underscores the importance of understanding the legal basis for their separation benefits. It is advisable for employees to seek clarification from their HR departments or legal advisors regarding the calculation of their separation pay to ensure they receive what they are legally entitled to.

    Key Lessons:

    • Government agencies must adhere strictly to the legal provisions governing separation pay calculations.
    • Any deviation from statutory requirements, such as rounding off service length, requires presidential approval.
    • Employees should be aware of their rights and the legal basis for their benefits, seeking professional advice if necessary.

    Frequently Asked Questions

    What is separation pay for government employees?

    Separation pay for government employees is a benefit provided to those who are displaced or separated from service due to organizational restructuring or privatization, as stipulated under specific laws like the EPIRA.

    Can the length of service be rounded off when calculating separation pay?

    No, the Supreme Court has ruled that rounding off the length of service to calculate separation pay for government employees is not permissible under the EPIRA without presidential approval.

    What are the implications of this ruling for approving officers?

    Approving officers may be absolved from liability if they acted in good faith, relying on board resolutions. However, they must ensure that all actions are in compliance with the law.

    How can employees ensure they receive fair separation pay?

    Employees should review their separation pay calculations with their HR department and seek legal advice if they believe there are discrepancies or if they need clarification on their entitlements.

    What should government agencies do to comply with this ruling?

    Agencies must review their separation pay policies to ensure they align with the EPIRA and other relevant laws, and seek presidential approval for any increases in benefits.

    ASG Law specializes in employment and labor law for government agencies. Contact us or email hello@asglawpartners.com to schedule a consultation.

  • COA Disallowances: Navigating Good Faith and Refund Obligations in the Philippines

    Navigating COA Disallowances: Understanding Good Faith and Refund Obligations

    Cagayan de Oro City Water District vs. Commission on Audit, G.R. No. 213789, April 27, 2021

    Imagine a scenario where government employees receive bonuses or allowances, only to later discover that these benefits were improperly authorized. This is a common issue in the Philippines, often leading to Commission on Audit (COA) disallowances and subsequent refund demands. The Supreme Court case of Cagayan de Oro City Water District vs. Commission on Audit provides critical guidance on navigating these situations, particularly concerning the concept of “good faith” and the obligation to return disallowed funds.

    This case centered on the Cagayan de Oro City Water District (COWD) and the disallowance of various benefits and allowances granted to its Board of Directors (BOD) and employees. The COA demanded a refund, prompting a legal battle that ultimately reached the Supreme Court. The core legal question was whether the COA committed grave abuse of discretion in affirming the disallowance and ordering the refund of these benefits.

    Understanding the Legal Landscape of COA Disallowances

    COA disallowances are rooted in the Philippine Constitution and various laws designed to ensure the proper use of government funds. The State Audit Code of the Philippines (Presidential Decree No. 1445) empowers the COA to audit government agencies and disallow irregular, unnecessary, excessive, extravagant, or illegal expenditures.

    A key concept in these cases is “good faith.” The “good faith doctrine” traditionally shielded recipients of disallowed benefits from refunding the amounts if they received them without knowledge of any illegality. However, the Supreme Court has refined this doctrine over time, leading to the landmark case of Madera v. COA, which established clearer rules on refund obligations.

    Section 38 of the Administrative Code of 1987 protects officers who act in good faith, in the regular performance of official functions, and with the diligence of a good father of a family. However, Section 43 of the same code imposes solidary liability on officers who act in bad faith, malice, or gross negligence.

    The Supreme Court’s decision in Madera v. COA clarified that recipients of disallowed benefits, regardless of good or bad faith, are generally obliged to refund these to the government on the grounds of unjust enrichment and solutio indebiti. Solutio indebiti is a civil law principle that arises when someone receives something they are not entitled to, creating an obligation to return it.

    Hypothetical Example: A government agency grants its employees a “productivity bonus” based on a reasonable interpretation of existing regulations. Later, the COA disallows the bonus, finding that it exceeded the authorized amount. Under Madera, the employees would generally be required to return the excess amount, even if they acted in good faith.

    The COWD Case: A Detailed Breakdown

    The COWD case involved multiple COA audits spanning several years (1994-1999). These audits revealed various disallowed benefits and allowances granted to the COWD’s BOD and employees, including:

    • Mid-Year Incentive Pay
    • Service Incentive Pay
    • Year-End Incentive Pay
    • Hazard Pay
    • Amelioration Allowance
    • Staple Food Incentive
    • Cellular Phone Expenses
    • Car Plan
    • Car Plan Incidental Expenses
    • Benefits granted to those hired after July 1, 1989
    • Extraordinary and Miscellaneous Expenses
    • Donations to Religious and Civic Organizations

    The COA initially disallowed these expenses, ordering a refund. COWD appealed, arguing that the benefits were granted and received in good faith. The case eventually reached the Supreme Court, which applied the principles established in Madera v. COA.

    The Supreme Court’s decision hinged on several key findings:

    • Good Faith Not a Blanket Excuse: A general claim of good faith is insufficient to excuse the refund of disallowed amounts.
    • Liability of BOD Members: The BOD members were deemed to have acted in bad faith or gross negligence when they granted certain benefits, particularly those that violated Section 13 of Presidential Decree No. 198, which governs the compensation of water district directors.
    • Application of Solutio Indebiti: Employees who received disallowed benefits were generally liable to return them under the principle of solutio indebiti.

    The Court, however, recognized exceptions based on social justice considerations. It ruled that employees who received disallowed allowances and benefits more than three years before the notice of disallowance could be excused from refunding those amounts.

    “In the ultimate analysis, the Court, through these new precedents, has returned to the basic premise that the responsibility to return is a civil obligation to which fundamental civil law principles, such as unjust enrichment and solutio indebiti apply regardless of the good faith of passive recipients,” the Court stated.

    “Each disallowance is unique, inasmuch as the facts behind, nature of the amounts involved, and individuals so charged in one notice of disallowance are hardly ever the same with any other,” the Court further emphasized.

    Practical Implications for Government Agencies and Employees

    The COWD case, read in conjunction with Madera v. COA, has significant implications for government agencies and employees:

    • Stricter Scrutiny: Government agencies must exercise greater diligence in authorizing benefits and allowances, ensuring compliance with all applicable laws and regulations.
    • Documentation is Key: Proper documentation is crucial to demonstrate the legal basis for any benefits granted.
    • Awareness of Liabilities: Employees should be aware that they may be required to return disallowed benefits, even if they received them in good faith.

    Key Lessons:

    • Government agencies must ensure strict compliance with compensation laws and regulations.
    • Approving officers bear a significant responsibility to verify the legality of disbursements.
    • Employees should be aware of the potential for COA disallowances and the obligation to refund.

    Frequently Asked Questions (FAQs)

    Q: What is a COA disallowance?

    A: A COA disallowance is a decision by the Commission on Audit that certain government expenditures were irregular, unnecessary, excessive, extravagant, or illegal.

    Q: What does “good faith” mean in the context of COA disallowances?

    A: In this context, “good faith” generally refers to an honest intention and freedom from knowledge of circumstances that would put a person on inquiry about the legality of a transaction.

    Q: Am I required to refund disallowed benefits if I received them in good faith?

    A: Generally, yes. Under Madera v. COA, recipients are typically required to return disallowed benefits, regardless of good faith, unless certain exceptions apply.

    Q: What are the exceptions to the refund rule?

    A: Exceptions may be granted based on undue prejudice, social justice considerations, or if the amounts were genuinely given in consideration of services rendered.

    Q: What is solutio indebiti?

    A: Solutio indebiti is a legal principle that requires a person who receives something they are not entitled to, to return it to the rightful owner.

    Q: What should I do if I receive a notice of disallowance?

    A: Consult with a qualified lawyer to understand your rights and options. You may be able to appeal the disallowance or argue for an exception to the refund rule.

    Q: How does the three-year rule work?

    A: If you received disallowed benefits more than three years before the notice of disallowance, you may be excused from refunding those amounts based on social justice considerations.

    Q: Can approving officers be held liable for disallowed expenses?

    A: Yes. Approving officers who acted in bad faith, malice, or gross negligence can be held solidarily liable for the disallowed expenses.

    ASG Law specializes in government contracts and regulatory compliance. Contact us or email hello@asglawpartners.com to schedule a consultation.

  • CNA Incentive Disallowance: Upholding the Primacy of MOOE in Government Expenditures

    The Supreme Court affirmed the Commission on Audit’s (COA) decision disallowing the Collective Negotiation Agreement (CNA) incentive granted to employees of the Department of Public Works and Highways (DPWH) Region IV-A. The Court clarified that CNA incentives must be sourced solely from savings from the Maintenance and Other Operating Expenses (MOOE), not from Engineering and Administrative Overhead (EAO). This ruling underscores the importance of adhering to specific budgetary guidelines and ensures that government funds are utilized strictly for their intended purposes, as well as clarifying the responsibilities of certifying officers and the obligations of employees who receive disallowed benefits.

    Savings and Source: Can CNA Incentives Come From Engineering Funds?

    This case arose from a Notice of Disallowance (ND) issued by the COA regarding the CNA incentive granted to DPWH Region IV-A employees for the calendar year 2008. The incentive, amounting to P3,915,000.00, was sourced from the Engineering and Administrative Overhead (EAO) of the regional office. The COA disallowed this disbursement, citing Department of Budget and Management (DBM) Budget Circular No. 2006-1, which explicitly states that CNA incentives should be funded solely from savings from the Maintenance and Other Operating Expenses (MOOE). The DPWH argued that the EAO and MOOE serve substantially the same purpose, making the use of EAO funds permissible. This prompted a legal battle that ultimately reached the Supreme Court.

    The central legal question before the Supreme Court was whether the COA committed grave abuse of discretion in disallowing the CNA incentive. This involved interpreting the relevant administrative orders and budget circulars governing the grant of CNA incentives to government employees. The Court needed to determine if the DPWH’s interpretation of the permissible funding sources aligned with the established legal framework.

    The Court began its analysis by reiterating the constitutional mandate of the COA as the guardian of public funds. It emphasized that the COA is empowered to determine and disallow irregular, unnecessary, excessive, extravagant, or unconscionable expenditures of government funds. The Supreme Court has consistently upheld the COA’s authority to ensure that public funds are utilized for their intended purpose. This stems from the principle that public office is a public trust, and government resources must be managed responsibly.

    The legal framework governing the grant of CNA incentives involves several key issuances. PSLMC Resolution No. 4, Series of 2002, authorized the grant of CNA incentives to employees in National Government Agencies (NGAs), State Universities and Colleges (SUCs), and Local Government Units (LGUs). It stipulated that the CNA incentive may be provided in recognition of the joint efforts of labor and management to achieve planned targets and services at a lesser cost. However, this resolution also outlined critical guidelines.

    Section 1 of PSLMC Resolution No. 4 mandated that only savings generated *after* the signing of the CNA could be used for the incentive. Section 2 further required the inclusion of cost-cutting measures and systems improvements in the CNA to ensure the generation of savings. Building on this, Administrative Order (A.O.) No. 135, Series of 2005, confirmed the grant of CNA incentives but reiterated that the incentive must be sourced solely from savings generated during the CNA’s lifetime. A.O. No. 135 also clarified that CNA incentives could only be extended to rank-and-file employees.

    DBM Budget Circular No. 2006-1 provided further clarity and limitations. Item No. 7 of the circular specifically addressed the funding source for CNA incentives, stating:

    7.1 The CNA Incentive shall be sourced solely from savings from released Maintenance and Other Operating Expenses (MOOE) allotments for the year under review, still valid for obligation during the year of payment of the CNA, subject to the following conditions:

    The DBM circular made it unequivocally clear that CNA incentives could only be sourced from MOOE savings, effectively precluding the use of other funds like EAO. This provision was the cornerstone of the COA’s disallowance and the subsequent Supreme Court ruling.

    Faced with these clear directives, the DPWH argued that EAO and MOOE serve substantially the same purpose, justifying the use of EAO funds. They cited a budget deliberation before the Committee on Appropriations, where a DPWH representative stated that EAO could cover overhead and operating expenses. However, the Court rejected this argument, noting that the cited exchange pertained to the 2011 GAA, not the 2008 disbursement in question. More importantly, the Court found nothing in the exchange to suggest that EAO could be used as a substitute for MOOE in funding CNA incentives.

    Cuaresma, one of the certifying officers, argued that she relied on a memorandum issued by the DPWH Secretary authorizing the use of EAO funds. The Court dismissed this defense, pointing out that the same memorandum cited A.O. No. 135 as its basis and explicitly stated that the CNA incentive was subject to the usual accounting and auditing rules. As such, Cuaresma was obligated to ensure compliance with DBM Budget Circular No. 2006-1.

    Furthermore, the DPWH raised the issue of selective enforcement, claiming that other departments and regional offices had sourced CNA incentives from EAO without being disallowed by the COA. The Court rejected this argument as well. Citing People v. Dela Piedra, the Court stated that an erroneous performance of statutory duty does not constitute a violation of the equal protection clause unless intentional or purposeful discrimination is shown. The DPWH failed to provide any evidence of such discrimination.

    Regarding the liability for the disallowed amount, the Court held that Cuaresma, as a certifying officer, was duty-bound to ensure compliance with the relevant regulations before certifying the availability of funds. Her failure to do so made her liable for the disallowance. The Court initially sided with the COA’s determination that passive recipients (DPWH IV-A employees) need not refund the benefits they received in good faith. However, after further consideration, the Court modified this aspect of the ruling.

    The Court ultimately concluded that the DPWH IV-A employees who benefited from the incentive were also obligated to return the amounts they received under the principle of unjust enrichment. The Court emphasized that unjust enrichment occurs when a person unjustly retains a benefit to the loss of another without just or legal ground, requiring the return of the benefit. Article 22 of the Civil Code provides the statutory basis for this principle.

    The Court reasoned that the DPWH IV-A employees received the CNA incentive without a valid basis or justification because it was released as a consequence of the certifying and approving officers’ erroneous application of DBM Budget Circular No. 2006-1. Unlike ordinary monetary benefits, the CNA incentive involved the participation of employees in its negotiation and approval. This participation, the Court argued, should have made them aware of the requirements for the valid release of the incentive. In essence, they should have known they were undeserving of the benefit.

    FAQs

    What was the key issue in this case? The key issue was whether the Commission on Audit (COA) committed grave abuse of discretion in disallowing the Collective Negotiation Agreement (CNA) incentive paid to employees of the Department of Public Works and Highways (DPWH) Region IV-A, which was sourced from Engineering and Administrative Overhead (EAO) instead of Maintenance and Other Operating Expenses (MOOE).
    What is a CNA incentive? A CNA incentive is a benefit granted to government employees as a reward for their collective efforts in achieving cost-cutting measures and improving efficiency within their agency, it serves as motivation for increased productivity and better performance.
    From where should CNA incentives be sourced? According to DBM Budget Circular No. 2006-1, CNA incentives must be sourced solely from savings from released Maintenance and Other Operating Expenses (MOOE).
    Why was the CNA incentive disallowed in this case? The CNA incentive was disallowed because it was paid out of savings from the Engineering and Administrative Overhead (EAO), which is a violation of DBM Budget Circular No. 2006-1.
    Who was held liable for the disallowed CNA incentive? The certifying and approving officers of DPWH IV-A, as well as all the employees who received the CNA incentive, were held liable for the amount of the disallowance.
    What is the principle of unjust enrichment? The principle of unjust enrichment states that a person who receives something of value without a valid legal basis must return it to avoid unjustly benefiting at the expense of another. It is based on the concept of fairness and equity.
    Why were the employees required to return the CNA incentive? The employees were required to return the CNA incentive because they received it without a valid legal basis, as it was sourced from the wrong fund. Allowing them to keep it would constitute unjust enrichment at the expense of the government.
    What was the Court’s ruling in this case? The Supreme Court affirmed the COA’s decision to disallow the CNA incentive and ruled that both the certifying/approving officers and the employee recipients are liable for the amount of the disallowance and must reimburse the amounts they received.

    The Supreme Court’s decision in this case serves as a clear reminder of the importance of strict adherence to budgetary guidelines in government spending. It also underscores the responsibility of certifying officers to ensure compliance with all relevant regulations. The ruling clarifies the obligations of employees who receive benefits that are later disallowed, emphasizing the principle of unjust enrichment.

    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: DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS, REGION IV-A AND GENEVIEVE E. CUARESMA VS COMMISSION ON AUDIT, G.R. No. 237987, March 19, 2019

  • Good Faith vs. Gross Negligence: Defining Liability in Government Benefit Disallowances

    This Supreme Court case clarifies when government officials and employees must return disallowed benefits. The Court ruled that anniversary bonuses received in good faith need not be refunded, while extra cash gifts and honoraria, lacking proper legal basis, must be returned by approving officers who acted with gross negligence. This decision underscores the importance of adhering to specific legal and regulatory requirements when disbursing public funds.

    Celebrating Milestones or Misspending Funds? Unpacking Anniversary Bonuses and COA Disallowances

    The case of Nayong Pilipino Foundation, Inc. v. Chairperson Ma. Gracia M. Pulido Tan, et al. (G.R. No. 213200, September 19, 2017) revolves around the Commission on Audit’s (COA) disallowance of certain benefits granted by the Nayong Pilipino Foundation, Inc. (NPFI) to its employees. These benefits included anniversary bonuses, extra cash gifts, and honoraria paid to members of the Bids and Awards Committee (BAC) and Technical Working Group (TWG). The central legal question is whether the COA correctly disallowed these payments, and if so, who should be held liable for their refund.

    The facts show that NPFI, in commemoration of its 30th and 35th founding anniversaries, granted anniversary bonuses to its officers and employees. Additionally, an extra cash gift was given in 2004. The COA issued Audit Observation Memoranda (AOMs), questioning the legal basis of these grants. The Department of Budget and Management (DBM) later opined that the anniversary bonus was unauthorized because NPFI’s anniversary should be reckoned from its incorporation as a public corporation in 1972, not its initial incorporation as a private entity. This raised questions about the validity of payments made based on the earlier date.

    In response to the AOMs, NPFI sought approval from the Office of the President (OP) and DBM, arguing that Administrative Order (A.O.) No. 263 and DBM National Budget Circular No. 452 authorized the anniversary bonus. They also cited DBM Budget Circular No. 2002-04 for the extra cash gift. However, the DBM found the payments improper, leading to a Notice of Disallowance (ND) issued by the COA Legal and Adjudication Office (LAO)-Corporate. The NPFI appealed, but the disallowance was upheld by the Adjudication and Settlement Board (ASB) and eventually by the COA itself.

    NPFI then elevated the matter to the Supreme Court, arguing that the COA gravely abused its discretion. They contended that the anniversary bonus was authorized by A.O. No. 263 and DBM National Budget Circular No. 452, and the extra cash gift was supported by DBM Budget Circular No. 2002-04. They also argued that the COA should have considered the pending motion for reconsideration before the OP. As for the honoraria, NPFI claimed that the COA failed to prove that the payments exceeded the 25% ceiling set by Republic Act (R.A.) No. 9184. Finally, NPFI invoked good faith, urging the Court to rule in its favor.

    The Supreme Court partly granted the petition, distinguishing between the anniversary bonus and the extra cash gift and honoraria. The Court emphasized the COA’s constitutional mandate as the guardian of public funds, with broad powers over government revenue and expenditures. This includes the authority to prevent irregular, unnecessary, excessive, extravagant, or unconscionable expenditures.

    However, the Court also acknowledged the principle of good faith. It found that NPFI had acted in good faith when granting the anniversary bonus, relying on the honest belief that its founding anniversary was in 1969. Citing precedents like Blaquera v. Alcala (356 Phil. 678 (1998)) and De Jesus v. Commission on Audit (451 Phil. 814 (2003)), the Court held that recipients of the anniversary bonus need not refund the amounts received.

    However, this finding of good faith did not extend to the extra cash gift and honoraria. The Court noted that DBM Budget Circular 2002-4 explicitly authorized the extra cash gift only for the year 2002. Therefore, NPFI could not reasonably rely on it as a basis for granting the benefit in 2004 without further approval. This represents a clear violation of existing regulations.

    Regarding the honoraria, the Court cited Sison, et al. v. Tablang, et al. (606 Phil. 740 (2009)), which held that Section 15 of R.A. No. 9184 alone is insufficient to justify the payment of honoraria to BAC members without enabling guidelines from the DBM. As the payments in this case were made before the issuance of DBM Circular No. 2004-5, which set forth the guidelines, the disallowance was proper. The Supreme Court emphasized that compliance with the DBM guidelines is a necessary condition for the right to the honoraria to accrue.

    The Court then addressed the issue of liability for the refund of the disallowed amounts. Citing Section 103 of Presidential Decree No. 1445 and Section 19 of the Manual of Certificate of Settlement and Balances, COA Circular No. 94-001, the Court reiterated that public officials directly responsible for unlawful expenditures are personally liable. While recipients who received the benefits in good faith are not required to refund, officers who approved the disallowed allowances or benefits in bad faith or with gross negligence must do so. This liability exists regardless of whether they personally received the disallowed benefit.

    The Court clarified that NPFI’s Board of Trustees and officers, despite the presumption of regularity in the performance of their duties, could not claim good faith in this instance. They were aware of the limitations of DBM Budget Circular 2002-4 and the need for DBM guidelines under R.A. No. 9184. Therefore, the Court held that NPFI’s Board of Trustees and officers who participated in the approval and authorized the release of the disallowed extra cash gift and honorarium were solidarily liable for their refund. This means that they are jointly and individually responsible for the entire amount.

    The decision underscores the importance of due diligence and adherence to legal and regulatory requirements in the disbursement of public funds. Public officials are expected to be knowledgeable about the laws and regulations governing their actions and cannot claim good faith when they knowingly violate those provisions. This ruling serves as a reminder that public office is a public trust, and those who wield it are accountable for their actions.

    FAQs

    What was the key issue in this case? The key issue was whether the COA correctly disallowed the payment of anniversary bonuses, extra cash gifts, and honoraria by NPFI, and who should be liable for refunding these amounts. The court distinguished between benefits received in good faith and those disbursed in violation of clear legal guidelines.
    Why was the anniversary bonus initially disallowed? The anniversary bonus was initially disallowed because COA determined that NPFI calculated its anniversary from the wrong date. COA said NPFI should have used the date it was incorporated as a public corporation, not when it was initially a private entity.
    Why did the Supreme Court allow the recipients to keep the anniversary bonus? The Supreme Court allowed the recipients to keep the anniversary bonus because they received it in good faith, believing the initial anniversary calculation was correct. The Court applied the principle that benefits received in good faith need not be refunded.
    Why was the extra cash gift disallowed? The extra cash gift was disallowed because NPFI based its grant on a DBM circular that only authorized the gift for a specific year (2002). Extending the benefit without further approval was deemed a violation of existing regulations.
    What was the issue with the honoraria payments? The honoraria payments were disallowed because they were made before the DBM issued the necessary guidelines for such payments. The Supreme Court emphasized that the guidelines were a prerequisite for the legality of the honoraria.
    Who is liable for refunding the disallowed extra cash gift and honoraria? NPFI’s Board of Trustees and officers who participated in the approval and authorization of the extra cash gift and honoraria are solidarily liable for the refund. The Court found they could not claim good faith due to their awareness of the relevant legal limitations.
    What does “solidarily liable” mean? “Solidarily liable” means that each of the responsible individuals is liable for the entire amount of the disallowed payments. The government can recover the full amount from any one of them, or from all of them collectively.
    What is the significance of “good faith” in this case? “Good faith” is crucial because it determines whether recipients of disallowed benefits must return the money. If the benefits were received in good faith, recipients are typically not required to refund them, but those who authorized the payment without legal basis can still be liable.
    What is the role of the Commission on Audit (COA)? The COA is the government’s audit body responsible for ensuring accountability and transparency in the use of public funds. It has the power to disallow irregular, unnecessary, or excessive expenditures.
    What is Administrative Order (A.O.) No. 263 and DBM National Budget Circular No. 452? Administrative Order No. 263 authorizes government entities to grant anniversary bonuses. DBM National Budget Circular No. 452 clarifies the implementation, specifying eligibility and funding requirements for anniversary bonuses.

    In conclusion, this case illustrates the delicate balance between granting employee benefits and adhering to strict legal and regulatory requirements. The Supreme Court’s decision underscores that public officials must exercise due diligence and ensure a solid legal basis for all expenditures. Good faith can protect recipients, but it does not absolve approving officers from liability when they act with gross negligence or in violation of explicit legal provisions.

    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: Nayong Pilipino Foundation, Inc. v. COA, G.R. No. 213200, September 19, 2017