SUBJECT: The Rule on ‘The Disallowance of Government Expenditures’ by the COA

I. Introduction

This memorandum provides an exhaustive analysis of the rule on the disallowance of government expenditures by the Commission on Audit (COA). The power to disallow is a core constitutional function of the COA, serving as a primary mechanism to enforce fiscal responsibility and accountability in the Philippine government. This research will examine the constitutional and statutory bases of this power, the procedural rules governing disallowance, the legal effects of a disallowance, and the liabilities of the officers and individuals involved. The analysis is grounded in the 1987 Constitution , relevant statutes, primarily the Administrative Code of 1987, and the jurisprudence of the Supreme Court.

II. Constitutional and Statutory Basis

The power of disallowance is rooted in Section 2(1), Article IX-D of the 1987 Constitution , which empowers the COA 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.” This broad grant is operationalized by Book V, Title I-B, Chapter 4, Subchapter C of the Administrative Code of 1987. Specifically, Section 52 provides that expenditures of government funds or uses of government property in violation of law or regulations shall be a disallowance in audit. The Government Auditing Code of the Philippines (Presidential Decree No. 1445) further solidifies this authority, establishing the fundamental principles governing public financial transactions and their audit.

III. Nature and Purpose of a Disallowance

A disallowance is a formal declaration by an auditor that a particular expenditure of government funds or use of government property is illegal, irregular, unnecessary, excessive, extravagant, or unconscionable. It is not a penal sanction but an administrative remedy to correct an erroneous transaction and prevent irregular disbursements. The primary purposes are: (1) to enforce adherence to appropriation laws, relevant statutes, and auditing rules and regulations; (2) to conserve government resources; (3) to ensure that every peso of public funds is spent for a public purpose; and (4) to fix the accountability of public officers involved in the transaction.

IV. Grounds for Disallowance

The grounds for disallowance are enumerated in the Administrative Code and COA rules and are broadly construed to protect the public fisc. The principal grounds include:

Violation of law or established rules and regulations: This is the most common ground, covering expenditures contrary to specific provisions of appropriation acts, procurement laws ( Republic Act No. 9184 ), and other pertinent statutes.

Lack of legal basis or authority: Expenditures made without an underlying law, ordinance, or appropriate executive authorization.

Non-compliance with conditions set forth in the appropriation: Failure to meet the specific conditions attached to a fund release or appropriation.

Incurrence of expenditure in excess of appropriation or allotment: Violation of the fundamental principle that no money shall be paid out of the Treasury except in pursuance of an appropriation made by law.

Failure to post the required notices or to conduct mandatory public bidding.

Payment for goods not delivered or services not rendered.

Payment of salaries, allowances, or benefits without legal basis (e.g., unauthorized bonuses).

Unnecessary, excessive, extravagant, or unconscionable expenditure.

V. The Disallowance Process

The process is initiated by an auditor upon discovery of a questionable transaction during a post-audit. The Notice of Disallowance (ND) is issued to the head of the agency and the persons determined to be liable. The ND must state the particulars of the disallowed transaction, the grounds, the laws/rules violated, and the persons liable. The persons named may file a Motion for Reconsideration with the Director or Cluster Director of the COA within six (6) months from receipt of the ND. An adverse decision may be appealed to the COA Commission Proper (the collegial body composed of the Chairperson and two Commissioners) via a Petition for Review. The decision of the COA Commission Proper is final and executory, but may be elevated to the Supreme Court via a Petition for Certiorari under Rule 64 of the Rules of Court on the ground of grave abuse of discretion amounting to lack or excess of jurisdiction.

VI. Persons Liable and Nature of Liability

The ND specifies the persons held liable to settle the disallowed amount. Liability is personal and solidary. The categories of persons liable are:

Certifying Officers: Those who certified the completeness, propriety, and legality of the transaction (e.g., the head of the agency, the chief accountant). They are presumed liable under the doctrine of conclusiveness of a certificate.

Approving Officers: Those who gave final approval to the transaction.

Recipients/Payees: The individuals or entities who received the disallowed payment. They are liable based on the principle of solutio indebiti (payment by mistake).

The liability is solidary, meaning each obligor may be compelled to pay the entire amount, subject to the right of contribution from co-obligors.

VII. The “Return” Rule and Exceptions (Good Faith)

The general rule is that all persons found liable in an ND are solidarily liable to return the disallowed amount. However, significant jurisprudence has established exceptions based on good faith. The landmark case of Madera v. Commission on Audit ( G.R. No. 244128 , September 8, 2020) and the subsequent Resolution in Araullo v. Commission on Audit (G.R. No. 210910, August 15, 2023) have systematized the rules on return. The following comparative table outlines the liability framework:

Person Liable	General Rule on Return	Exception (Good Faith)	Legal Basis / Condition
Approving/Certifying Officers	Must return the disallowed amount.	May be excused from return if they acted in good faith and with due diligence.	Good faith is presumed for passive recipients; must prove they acted with the diligence of a good father of a family.
Recipients (Passive)	Must return the disallowed amount.	Exempt from return if they received the payment in good faith.	Good faith is presumed for passive recipients (e.g., rank-and-file employees receiving authorized benefits).
Recipients (Active)	Must return the disallowed amount.	Not exempt from return.	Participants who actively participated in the illegal transaction (e.g., by concocting schemes) cannot claim good faith.
Payees/Suppliers	Must return the disallowed amount.	May be excused if they provided the goods or services and there was no overpricing.	Liability is based on solutio indebiti; but equity may excuse return if they gave equivalent value.

Good faith, in this context, means that the person acted with a honest belief in the validity of the transaction, without knowledge of its defects, and without participation in the irregularity.

VIII. Finality and Enforcement of a Disallowance

A decision of the COA Commission Proper becomes final and executory after the lapse of thirty (30) days from notice, if no appeal is taken to the Supreme Court. Upon finality, the COA issues a Notice of Finality of Decision and subsequently an Order of Execution. The COA can enforce the order by directing the proper agency to withhold the salaries and benefits of the liable persons, or by issuing a certificate of indebtedness which may be enforced like a money judgment in court. The Settlement and Compromise of disallowances is allowed under COA rules, subject to the approval of the Commission Proper, usually involving a reduction of the total amount payable under certain conditions.

IX. Judicial Review of COA Disallowances

The Supreme Court exercises jurisdiction over final decisions of the COA Commission Proper through a Petition for Certiorari under Rule 64. The Court’s review is limited to determining whether the COA acted without or in excess of jurisdiction, or with grave abuse of discretion. Grave abuse of discretion implies a capricious and whimsical exercise of judgment equivalent to lack of jurisdiction. The Court generally accords respect to the COA’s factual findings and expertise in auditing matters. It will not substitute its own judgment unless there is a clear showing of such abuse.

X. Conclusion

The rule on disallowance is a potent tool of fiscal control wielded by the constitutional body, the Commission on Audit. It is designed to ensure strict compliance with laws governing public expenditure and to hold public officers and recipients accountable. The jurisprudence, particularly the Madera and Araullo doctrines, has introduced a critical element of equity through the good faith exceptions, balancing the imperative of accountability with fairness to passive recipients and diligent officers. Nevertheless, the overarching principle remains the paramount need to safeguard public funds, and the liability to return disallowed amounts is the rule, with the exceptions being narrowly applied. All government officers involved in the chain of expenditure must exercise the highest degree of diligence to avoid being held personally and solidarily liable for disallowed transactions.