Accountability in Public Service: Internal Auditors' Duty to Prevent Misuse of Funds

The Supreme Court has affirmed that internal auditors in government agencies cannot escape liability for irregular fund disbursements simply by claiming good faith or lack of prior knowledge. In Paraiso-Aban v. Commission on Audit (G.R. No. 217948, January 12, 2016), the Court En Banc ruled that an internal auditor who fails to conduct thorough verification of large transactions bears responsibility for resulting losses to the government. This decision clarifies the standard of diligence expected from public officers tasked with safeguarding state funds.

The Case Background

The case arose from an audit of the Armed Forces of the Philippines Retirement and Separation Benefits System (AFP-RSBS) conducted by the Commission on Audit (COA). The audit revealed that in 1996, AFP-RSBS purchased four parcels of land in Calamba, Laguna from Concord Resources, Inc. for P341,343,000.00. However, a different deed of sale registered with the Register of Deeds showed a price of only P91,024,800.00 — a discrepancy of P250,318,200.00.

The COA issued a Notice of Disallowance against several individuals, including Alma G. Paraiso-Aban, who was then the Acting Head of the Office of Internal Auditor of AFP-RSBS. She was held liable for "verifying the correctness of payment" on the transaction vouchers.

The Internal Auditor's Defense

Paraiso-Aban argued that she had no knowledge of the transaction before her department's post-audit; that payments had already been made before her verification; that supporting documents appeared complete; and that she signed the vouchers in good faith. She also pointed out that she did not personally benefit from the transaction.

The COA denied her request for exclusion from liability, and she elevated the case to the Supreme Court via certiorari, alleging grave abuse of discretion.

The Supreme Court's Ruling

The Court found no grave abuse of discretion on the part of the COA and dismissed the petition. It emphasized that the COA's audit power is a constitutional mechanism for check and balance under Article IX-D of the 1987 Constitution. The Court also noted that findings of administrative agencies, especially constitutionally-created bodies like the COA, are generally accorded great respect and finality when supported by substantial evidence.

More importantly, the Court addressed the substantive issue of an internal auditor's duty. Under Presidential Decree No. 1445, internal control is defined as the plan of organization and all coordinate methods adopted to safeguard assets, check the accuracy of accounting data, and encourage adherence to prescribed managerial policies. The same decree makes it the direct responsibility of the agency head to install and monitor a sound internal control system — but the agency head necessarily relies on the internal audit head and staff.

The Court held that Paraiso-Aban's verification was inadequate. She admitted that she merely checked the transaction against the AFP-RSBS's "approved" planned purchases and budgets, and relied on the post-audit performed by her subordinates. She consulted no independent sources — such as documents filed with the Bureau of Internal Revenue or the Register of Deeds, or data on prevailing real estate prices. Had she done so, she could have discovered the two conflicting deeds of sale.

The Standard of Diligence Required

The Court was clear: an internal auditor cannot simply rubber-stamp transactions. The petitioner "miserably failed to perform any necessary personal verification of the correctness of the prices paid," especially given the huge amount involved and the likelihood of padded prices in such deals.

The Court also rejected the defense that she learned of the transaction only after payments were made. As head of internal audit, it was her duty to require that she be apprised beforehand of planned significant transactions. Several months had elapsed between payment and her verification — ample time to procure independent data.

The Court applied the COA's rules on determining liability for audit disallowances, which consider the nature of the disallowance, the duties of the officer concerned, the extent of participation, and the amount of loss. Officers who certify as to the necessity, legality, and adequacy of documents are liable according to their certifications.

Practical Takeaways

• Internal auditors must conduct independent verification — relying on subordinates' post-audit or comparing figures against approved budgets is not enough when significant amounts are involved.
• Good faith is not a blanket defense — a public officer who signs a certification of correctness without performing adequate due diligence can be held liable for resulting losses.
• Knowledge of large transactions is presumed to be part of the job — internal audit heads must require that they be informed of significant planned transactions beforehand.
• COA findings are highly deferential — courts will not overturn COA decisions absent grave abuse of discretion, so the audit body's factual findings carry substantial weight.
• Cross-checking against external records is essential — verifying documents with the BIR, Register of Deeds, or market data can uncover discrepancies that internal records alone may hide.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.