VOL.

419, JANUARY 14, 2004 363

Feliciano vs. Commission on Audit
*
G.R. No. 147402. January 14, 2004.

ENGR. RANULFO C. FELICIANO, in his capacity as General

Manager of the Leyte Metropolitan Water District (LMWD),
Tacloban City, petitioner, vs. COMMISSION ON AUDIT, Chairman
CELSO D. GANGAN, Commissioners RAUL C. FLORES and
EMMANUEL M. DALMAN, and Regional Director of COA
Region VIII, respondents.

Commission on Audit; Jurisdiction; The COA’s audit jurisdiction

extends not only to government “agencies or instrumentalities,” but also to
“government-owned and controlled corporations with original charters as
well as “other government-owned or controlled corporations” without
original charters.—The Constitution and existing laws mandate COA to
audit all government agencies, including government-owned and controlled
corporations (“GOCCs”) with original charters. An LWD is a GOCC with
an original charter. x x x The COA’s audit jurisdiction extends not only to
government “agencies or instrumentalities,” but also to “government-owned
and controlled corporations with original charters” as well as “other
government-owned or controlled corporations” without original charters.
Same; Same; The determining factor of COA’s audit jurisdiction is
government ownership or control of the corporation.—The determining
factor of COA’s audit jurisdiction is governmentownership or control of the
corporation. In Philippine Veterans Bank Employees Union-NUBE v.
Philippine Veterans Bank, the Court even ruled that the criterion of
ownership and control is more important than the issue of original charter.

_______________

* EN BANC.

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364 SUPREME COURT REPORTS ANNOTATED

Feliciano vs. Commission on Audit

 Corporation Law; Congress cannot enact a law creating a private
corporation with a special charter; Since private corporations cannot have
special charters, it follows that Congress can create corporations with
special charters only if such corporations are government-owned or
controlled.—In short, Congress cannot enact a law creating a private
corporation with a special charter. Such legislation would be
unconstitutional. Private corporations may exist only under a general law. If
the corporation is private, it must necessarily exist under a general law.
Stated differently, only corporations created under a general law can qualify
as private corporations. Under existing laws, that general law is the
Corporation Code, except that the Cooperative Code governs the
incorporation of cooperatives. The Constitution authorizes Congress to
create government-owned or controlled corporations through special
charters. Since private corporations cannot have special charters, it follows
that Congress can create corporations with special charters only if such
corporations are government-owned or controlled.
Same; Local Water Districts; Local Water Districts (LWDs) are not
private corporations because they are not created under the Corporation
Code.—Obviously, LWDs are not private corporations because they are not
created under the Corporation Code. LWDs are not registered with the
Securities and Exchange Commission. Section 14 of the Corporation Code
states that “[A]ll corporations organized under this code shall file with the
Securities and Exchange Commission articles of incorporation x x x.”
LWDs have no articles of incorporation, no incorporators and no
stockholders or members. There are no stockholders or members to elect the
board directors of LWDs as in the case of all corporations registered with
the Securities and Exchange Commission. The local mayor or the provincial
governor appoints the directors of LWDs for a fixed term of office.
Same; Same; LWDs can validly exist only if they are government-
owned or controlled.—LWDs exist by virtue of PD 198, which constitutes
their special charter. Since under the Constitution only government-owned
or controlled corporations may have special charters, LWDs can validly
exist only if they are government-owned or controlled. To claim that LWDs
are private corporations with a special charter is to admit that their existence
is constitutionally infirm.
Same; Same; LWDs derive their legal existence and power from PD
198.—Unlike private corporations, which derive their legal existence and
power from the Corporation Code, LWDs derive their legal existence and
power from PD 198.
Same; Same; The Sangguniang Bayan may establish a waterworks
system only in accordance with the provisions of PD 198.—The
Sangguniang Bayan may establish a waterworks system only in accordance
with

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 VOL. 419, JANUARY 14, 2004 365

Feliciano vs. Commission on Audit

the provisions of PD 198. The Sangguniang Bayan has no power to create a

corporate entity that will operate its waterworks system. However, the
Sangguniang Bayan may avail of existing enabling laws, like PD 198, to
form and incorporate a water district, Besides, even assuming for the sake of
argument that the Sangguniang Bayan has the power to create corporations,
the LWDs would remain government-owned or controlled corporations
subject to COA’s audit jurisdiction. The resolution of the Sangguniang
Bayan would constitute an LWD’s special charter, making the LWD a
goyernment-owned and controlled corporation with an original charter.
Same; Same; The board directors and other personnel of LWDs are
government employees subject to civil service laws and anti-graft laws.—
The government owns and controls LWDs. The government organizes
LWDs in accordance with a specific law, PD 198. There is no private party
involved as co-owner in the creation of an LWD. Just prior to the creation of
LWDs, the national or local government owns and controls all their assets.
The government controls LWDs because under PD 198 the municipal or city
mayor, or the provincial governor, appoints all the board directors of an
LWD for a fixed term of six years. The board directors of LWDs are not co-
owners of the LWDs. LWDs have no private stockholders or members. The
board directors and other personnel of LWDs are government employees
subject to civil service laws and anti-graft laws.

SPECIAL CIVIL ACTION in the Supreme Court. Certiorari.

The facts are stated in the opinion of the Court.

Nathanille P. Roa for petitioner.
The Solicitor General for respondents.

CARPIO, J.:

The Case
1
This is a petition for certiorari to annul the Commission on Audit’s
(“COA”) Resolution dated 3 January 2000 and the Decision dated
30 January 2001 denying the Motion for Reconsideration. The COA
denied petitioner Ranulfo C. Feliciano’s request for COA to cease
all audit services, and to stop charging auditing fees, to Leyte
Metropolitan Water District (“LMWD”). The COA also de-

_______________

1 Under Rule 64 of the 1997 Revised Rules of Court.

366
366 SUPREME COURT REPORTS ANNOTATED
Feliciano vs. Commission on Audit

nied petitioner’s request for COA to refund all auditing fees

previously paid by LMWD.

Antecedent Facts

A Special Audit Team from COA Regional Office No. VIII audited
the accounts of LMWD. Subsequently, LMWD received a letter
from COA dated 19 July 1999 requesting payment of auditing fees.
As General Manager of LMWD, petitioner sent a reply dated 12
October 1999 informing COA’s Regional Director that the water
district could not pay the auditing fees. Petitioner cited as basis for2
his action Sections 6 and 20 of Presidential Decree 198 (“PD 198”),
as well as Section 18 of Republic Act No. 6758 (“RA 6758”). The
Regional Director referred petitioner’s reply to the COA Chairman
on 18 October 1999.
On 19 October 1999, petitioner wrote COA through the Regional
Director asking for refund of all auditing fees LMWD previously
paid to COA.
On 16 March 2000, petitioner received COA Chairman Celso D.
Gangan’s Resolution dated 3 January 2000 denying his requests.
Petitioner filed a motion for reconsideration on 31 March 2000,
which COA denied on 30 January 2001.
On 13 March 2001, petitioner filed this instant petition. Attached
to the petition were resolutions of the Visayas Association of Water
Districts (VAWD) and the Philippine Association of Water Districts
(PAWD) supporting the petition.

The Ruling of the Commission on Audit

The COA ruled that this Court has already settled COA’s audit
jurisdiction over local water districts in Davao City Water
3
District v.
Civil Service Commission and Commission on Audit, as follows:

The above-quoted provision [referring to Section 3(b) PD 198] definitely

sets to naught petitioner’s contention that they are private corporations. It is
clear therefrom that the power to appoint the members who will comprise
the members of the Board of Directors belong to the local executives of the
local subdivision unit where such districts are located. In contrast, the
members of the Board of Directors or the trustees of a private

_______________

2 As amended by Presidential Decrees Nos. 768 and 1479.

3 G.R. Nos. 95237-38, 13 September 1991, 201 SCRA 593.
 367

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Feliciano vs. Commission on Audit

corporation are elected from among members or stockholders thereof. It

would not be amiss at this point to emphasize that a private corporation is
created for the private purpose, benefit, aim and end of its members or
stockholders. Necessarily, said members or stockholders should be given a
free hand to choose who will compose the governing body of their
corporation. But this is not the case here and this clearly indicates that
petitioners are not private corporations.

The COA also denied petitioner’s request for COA to stop charging
auditing fees as well as petitioner’s request for COA to refund all
auditing fees already paid.

The Issues

Petitioner contends that COA committed grave abuse of discretion

amounting to lack or excess of jurisdiction by auditing LMWD and
requiring it to pay auditing fees. Petitioner raises the following
issues for resolution:

1. Whether a Local Water District (“LWD”) created under PD

198, as amended, is a government-owned or controlled
corporation subject to the audit jurisdiction of COA;
2. Whether Section 20 of PD 198, as amended, prohibits
COA’s certified public accountants from auditing local
water districts; and
3. Whether Section 18 of RA 6758 prohibits the COA from
charging government-owned and controlled corporations
auditing fees.

The Ruling of the Court

The petition lacks merit. 4

The Constitution and existing laws mandate COA to audit all
government agencies, including government-owned and controlled
corporations (“GOCCs”) with original charters. An LWD is a GOCC
with an original charter. Section 2(1), Article IX-D of the
Constitution provides for COA’s audit jurisdiction, as follows:

SECTION 2. (1) 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, or any of its subdivisions,
agencies, or instrumentalities, including government-

_______________

4 Section 26, Government Auditing Code of the Philippines.

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368 SUPREME COURT REPORTS ANNOTATED

Feliciano vs. Commission on Audit

owned and controlled corporations with original charters, and on a post-

audit basis: (a) constitutional bodies, commissions and offices that have
been granted fiscal autonomy under this Constitution; (b) autonomous state
colleges and universities; (c) other government-owned or controlled
corporations and their subsidiaries; and (d) such non-governmental entities
receiving subsidy or equity, directly or indirectly, from or through the
government, which are required by law or the granting institution to submit
to such audit as a condition of subsidy or equity. However, where the
internal control system of the audited agencies is inadequate, the
Commission may adopt such measures, including temporary or special pre-
audit, as are necessary and appropriate to correct the deficiencies. It shall
keep the general accounts of the Government and, for such period as may be
provided by law, preserve the vouchers and other supporting papers
pertaining thereto. (Emphasis supplied)

The COA’s audit jurisdiction extends not only to government

“agencies or instrumentalities,” but also to “government-owned and
controlled corporations with original charters” as well as “other
government-owned or controlled corporations” without original
charters.

Whether LWDs are Private or Government-Owned

and Controlled Corporations with Original Charters
Petitioner seeks to revive a well-settled issue. Petitioner asks for a
re-examination of a doctrine backed by a long line of cases
culminating 5 in Davao City Water District v. Civil Service
Commission6
and just recently reiterated in De Jesus v. Commission
on Audit. Petitioner maintains that LWDs are not government-
owned and controlled corporations with original charters. Petitioner
even argues that LWDs are private corporations. Petitioner asks the
Court to consider certain interpretations of the applicable laws,
which would give a “new7 perspective to the issue of the true
character of water districts.”
Petitioner theorizes that what PD 198 created was the Local
Waters Utilities Administration (“LWUA”) and not the LWDs.
Petitioner claims that LWDs are created “pursuant to” and not
created directly by PD 198. Thus, petitioner concludes that PD 198
is not an “original charter” that would place LWDs within the

_______________

5Supranote 3.
6 G.R. No. 149154, 10 June 2003, 403 SCRA 666.
7 Rollo, p. 7.

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Feliciano vs. Commission on Audit

audit jurisdiction of COA as defined in Section 2(1), Article IX-D of

the Constitution. Petitioner elaborates that PD 198 does not create
LWDs since it does not expressly direct the creation of such entities,
but only
8
provides for their formation on an optional or voluntary
basis. Petitioner adds that the operative act that creates an LWD is
the approval of the Sanggunian Resolution as specified in PD 198.
Petitioner’s contention deserves scant consideration.
We begin by explaining the general framework under the
fundamental law. The Constitution recognizes two classes of
corporations. The first refers to private corporations created under a
general law. The second refers to government-owned or controlled
corporations created by special charters. Section 16, Article XII of
the Constitution provides:

Sec. 16. The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations. Government-
owned or controlled corporations may be created or established by special
charters in the interest of the common good and subject to the test of
economic viability.

The Constitution emphatically prohibits the creation of private 9

corporations except by a general law applicable to all citizens. The
purpose of this constitutional provision is to ban private corporations
created by special charters, which historically gave certain
individuals,
10
families or groups special privileges denied to other
citizens.
In short, Congress cannot enact a law creating a private
corporation with a special charter. Such legislation would be
unconstitutional. Private corporations may exist only under a general
law. If the corporation is private, it must necessarily exist under a
general law. Stated differently, only corporations created under a
general law can qualify as private corporations. Under existing laws,
that
_______________

8Ibid., p. 29.
9 See National Development Company v. Philippine Veterans Bank, G.R. Nos.
84132-33, 10 December 1990, 192 SCRA 257.
10 BERNAS, THE 1987 CONSTITUTION OF THE REPUBLIC OF THE
PHILIPPINES: A COMMENTARY 1181 (2003).

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370 SUPREME COURT REPORTS ANNOTATED

Feliciano vs. Commission on Audit
11
general law is the Corporation Code, except that 12
the Cooperative
Code governs the incorporation of cooperatives.
The Constitution authorizes Congress to create government-
owned or controlled corporations through special charters. Since
private corporations cannot have special charters, it follows that
Congress can create corporations with special charters only if such
corporations are government-owned or controlled.
Obviously, LWDs are not private corporations because they are
not created under the Corporation Code. LWDs are not registered
with the Securities and Exchange Commission. Section 14 of the
Corporation Code states that “[A]ll corporations organized under
this code shall file with the Securities and Exchange Commission
articles of incorporation x x x.” LWDs have no articles of
incorporation, no incorporators and no stockholders or members.
There are no stockholders or members to elect the board directors of
LWDs as in the case of all corporations registered with the Securities
and Exchange Commission. The local mayor or the provincial
governor appoints the directors of LWDs for a fixed term of office.
This Court has ruled that LWDs are not created under the
Corporation Code, thus:

From the foregoing pronouncement, it is clear that what has been excluded
from the coverage of the CSC are those corporations created pursuant to the
Corporation Code. Significantly, petitioners are not created under the said
code, but on the contrary, they were created
13
pursuant to a special law and
are governed primarily by its provision. (Emphasis supplied)

LWDs exist by virtue of PD 198, which constitutes their special

charter. Since under the Constitution only government-owned or
controlled corporations may have special charters, LWDs can validly
exist only if they are government-owned or controlled. To claim that
LWDs are private corporations with a special charter is to admit that
their existence is constitutionally infirm.
Unlike private corporations, which derive their legal existence
and power from the Corporation Code, LWDs derive their legal
_______________

11 Batas Pambansa Blg. 68.

12 Republic Act. No. 6938. Seealso Republic Act No. 6939 or the Cooperative
Development Authority Law.
13Supranote 3.

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VOL. 419, JANUARY 14, 2004 371

Feliciano vs. Commission on Audit
14
existence and power from PD 198. Sections 6 and 25 of PD 198
provide:

Section 6. Formation of District.—This Act is the source of

authorization and power to form and maintain a district. For purposes
of this Act, a district shall be considered as a quasi-public corporation
performing public service and supplying public wants. As such, a
district shall exercise the powers, rights and privileges given to private
corporations under existing laws, in addition to the powers granted in,
and subject to such restrictions imposed, under this Act.

(a) The name of the local water district, which shall include the name
of the city, municipality, or province, or region thereof, served by
said system, followed by the words “Water District.”
(b) A description of the boundary of the district. In the case of a city or
municipality, such boundary may include all lands within the city
or municipality. A district may include one or more municipalities,
cities or provinces, or portions thereof.
(c) A statement completely transferring any and all waterworks and/or
sewerage facilities managed, operated by or under the control of
such city, municipality or province to such district upon the filing
of resolution forming the district.
(d) A statement identifying the purpose for which the district is
formed, which shall include those purposes outlined in Section 5
above.
(e) The names of the initial directors of the district with the date of
expiration of term of office for each.
(f) A statement that the district may only be dissolved on the grounds
and under the conditions set forth in Section 44 of this Title.
(g) A statement acknowledging the powers, rights and obligations as
set forth in Section 36 of this Title.

Nothing in the resolution of formation shall state or infer that the local
legislative body has the power to dissolve, alter or affect the district beyond
that specifically provided for in this Act.
 If two or more cities, municipalities or provinces, or any combination
thereof, desire to form a single district, a similar resolution shall be adopted
in each city, municipality and province.
xxx

Sec. 25. Authorization.—The district may exercise all the powers which
are expressly granted by this Title or which are necessarily implied
from or incidental to the powers and purposes

_______________

14 As amended by PD 1479.

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372 SUPREME COURT REPORTS ANNOTATED

Feliciano vs. Commission on Audit

herein stated. For the purpose of carrying out the objectives of this Act, a
district is hereby granted the power of eminent domain, the exercise thereof
shall, however, be subject to review by the Administration. (Emphasis
supplied)

Clearly, LWDs exist as corporations; only by virtue of PD 198,

which expressly confers on LWDs corporate powers. Section 6 of
PD 198 provides that LWDs “shall exercise the powers, rights and
privileges given to private corporations under existing laws.”
Without PD 198, LWDs would have no corporate powers. Thus, PD
198 constitutes the special enabling charter of LWDs. The
ineluctable conclusion is that LWDs are government-owned and
controlled corporations with a special charter.
The phrase “government-owned and controlled corporations with
original charters” means GOCCs created under special laws and not
under the general incorporation law. There is no difference between
the term “original charters” and “special charters.”15 The Court
clarified this in National Service Corporation v. NLRC by citing the
deliberations in the Constitutional Commission, as follows:

THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.

Commissioner Romulo is recognized.
MR. ROMULO. Mr. Presiding Officer, I am amending my original
proposed amendment to now read as follows: “including
government-owned or controlled corporations WITH
ORIGINAL CHARTERS.” The purpose of this amendment is to
indicate that government corporations such as the GSIS and SSS,
which have original charters, fall within the ambit of the civil
service. However, corporations which are subsidiaries of these
chartered agencies such as the Philippine Airlines; Manila Hotel
and Hyatt are excluded from the coverage of the civil service.
THE PRESIDING OFFICER (Mr. Trenas). What does the
Committee say?
MR FOZ. Just one question, Mr. Presiding Officer, By the term
“original charters,” what exactly do we mean?
MR. ROMULO. We mean that they were created by law, by an act of
Congress, or by special law.

_______________

15 G.R. No. L-69870, 29 November 1988, 168 SCRA 122.

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VOL. 419, JANUARY 14, 2004 373

Feliciano vs. Commission on Audit

MR. FOZ. And not under the general corporation law.

MR. ROMULO. That is correct. Mr. Presiding Officer.
MR. FOZ. With that understanding and clarification, the Committee
accepts the amendment.
MR. NATIVIDAD. Mr. Presiding Officer, so those created by the
general corporation law are out.
MR. ROMULO. That is correct. (Emphasis supplied)
16
Again, in Davao City Water District v. Civil Service Commission,
the Court reiterated the meaning of the phrase “government-owned
and controlled corporations with original charters” in this wise:

By “government-owned or controlled corporation with original charter,”

We mean government owned or controlled corporation created by a special
law and not under the Corporation Code of the Philippines. Thus, in the
case of Lumanta v. NLRC (G.R. No. 82819, February 8, 1989, 170 SCRA
79, 82), We held:
“The Court, in National Service Corporation (NASECO) v. National
Labor Relations Commission, G.R. No. 69870, promulgated on 29
November 1988, quoting extensively from the deliberations of the 1986
Constitutional Commission in respect of the intent and meaning of the new
phrase ‘with original charter,’ in effect held that government-owned and
controlled corporations with original charter refer to corporations
chartered by special law as distinguished from corporations organized
under our general incorporation statute—the Corporation Code. In
NASECO, the company involved had been organized under the general
incorporation statute and was a subsidiary of the National Investment
Development Corporation (NEDC) which in turn was a subsidiary of the
Philippine National Bank, a bank chartered by a special statute. Thus,
government-owned or controlled corporations like NASECO are effectively,
excluded from the scope of the Civil Service.” (Emphasis supplied)
Petitioner’s contention that the Sangguniang Bayan resolution
creates the LWDs assumes that the Sangguniang Bayan has the
power to create corporations. This
17
is a patently baseless assumption.
The Local Government Code does not 18
vest in the Sangguniang
Bayan the power to create corporations. What the Local Gov-

_______________

16Supranote 3.
17 Republic Act No. 7160.
18 SeeSection 447 of the Local Government Code on the powers of the
Sangguniang Bayan.

374

374 SUPREME COURT REPORTS ANNOTATED

Feliciano vs. Commission on Audit

ernment Code empowers the Sangguniang Bayan to do is to provide

for the establishment of a waterworks system “subject to existing
laws.” Thus, Section 447(5)(vii) of the Local Government Code
provides:

SECTION 447. Powers, Duties, Functions and Compensation.—(a) The

sangguniang bayan, as the legislative body of the municipality, shall enact
ordinances, approve resolutions and appropriate funds for the general
welfare of the municipality and its inhabitants pursuant to Section 16 of this
Code and in the proper exercise of the corporate powers of the municipality
as provided for under Section 22 of this Code, and shall:
xxx

(vii) Subject to existing laws, provide for the establishment, operation, maintenance,
and repair of an efficient waterworks system to supply water for the inhabitants;
regulate the construction, maintenance, repair and use of hydrants, pumps, cisterns
and reservoirs; protect the purity and quantity of the water supply of the municipality
and, for this purpose, extend the coverage of appropriate ordinances over all territory
within the drainage area of said water supply and within one hundred (100) meters of
the reservoir, conduit, canal, aqueduct pumping station, or watershed used in
connection with the water service; and regulate the consumption, use or wastage of
water;

x x x. (Emphasis supplied)

The Sangguniang Bayan may establish a waterworks system only in

accordance with the provisions of PD 198. The Sangguniang Bayan
has no power to create a corporate entity that will operate its
waterworks system. However, the Sangguniang Bayan may avail of
existing enabling laws, like PD 198, to form and incorporate a water
district, Besides, even assuming for the sake of argument that the
Sangguniang Bayan has the power to create corporations, the LWDs
would remain government-owned or controlled corporations subject
to COA’s audit jurisdiction. The resolution of the Sangguniang
Bayan would constitute an LWD’s special charter, making the LWD
a goyernment-owned and controlled corporation with an original
charter. In any event,
19
the Court has already ruled in Baguio Water
District v. Trajano that the Sangguniang Bayan resolution is not the
special charter of LWDs, thus:

_______________

19 212 Phil. 674; 127 SCRA 730 (1984).

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VOL. 419, JANUARY 14, 2004 375

Feliciano vs. Commission on Audit

While it is true that a resolution of a local sanggunian is still necessary for

the final creation of a district, this Court is of the opinion that said resolution
cannot be considered as its charter, the same being intended only to
implement the provisions of said decree.

Petitioner further contends that a law must create directly and

explicitly a GOCC in order that it may have an original charter. In
short, petitioner argues that one special law cannot serve as enabling
law for several GOCCs but only for one GOCC. Section 16, Article
XII of the Constitution
20
mandates that “Congress shall not, except by
general law,” provide for the creation, of private corporations.
Thus, the Constitution prohibits one special law to create one private
corporation, requiring instead a “general law” to create private
corporations. In contrast, the same Section 16 states that
“Government-owned or controlled, corporations may be created or
established by special charters.” Thus, the Constitution permits
Congress to create a GOCC with a special charter. There is,
however, no prohibition on Congress to create several GOCCs of the
same class under one special enabling charter.
The rationale behind the prohibition on private corporations
having special charters does not apply to GOCCs. There is no
danger of creating special privileges to certain individuals, families
or groups if there is one special law creating each GOCC. Certainly,
such danger will not exist whether one special law creates one
GOCC, or one special enabling law creates several GOCCs. Thus,
Congress may create GOCCs either by special charters specific to
each GOCC, or by one special enabling charter applicable to a class
of GOCCs, like PD 198 which applies only to LWDs.
Petitioner also contends that21 LWDs are private corporations
because Section 6 of PD 198 declares that LWDs “shall be
considered quasi-public” in nature. Petitioner’s rationale is that only
private corporations may be deemed “quasi-public” and not public
corporations. Put differently, petitioner rationalizes that a public-
corporation cannot be deemed “quasi-public” because such
corporation is already public. Petitioner concludes that the term
“quasi-public” can only apply to private corporations. Petitioner’s
argument is inconsequential.

_______________

20 Emphasis supplied.
21 As amended by PD 1479.

376

376 SUPREME COURT REPORTS ANNOTATED

Feliciano vs. Commission on Audit

Petitioner forgets that the constitutional criterion on the exercise of

COA’s audit jurisdiction depends on the government’s ownership or
control of a corporation. The nature of the corporation, whether it is
private, quasi-public, or public is immaterial.
The Constitution vests in the COA audit jurisdiction over
“government-owned and controlled corporations with original
charters,” as well as “government-owned or controlled corporations”
without original charters. GOCCs with original charters are subject
to COA pre-audit, while GOCCs without original charters are
subject to COA post-audit. GOCCs without original charters refer to
corporations created under the Corporation Code but are owned or
controlled by the government. The nature or purpose of the
corporation is not material in determining COA’s audit jurisdiction.
Neither is the manner of creation of a corporation, whether under a
general or special law.
The determining factor of COA’s audit jurisdiction is government
ownership or control of the corporation. In Philippine Veterans
22
Bank
Employees Union-NUBE v. Philippine Veterans Bank, the Court
even ruled that the criterion of ownership and control is more
important than the issue of original charter, thus:

This point is important because the Constitution provides in its Article IX-
B, Section 2(1) that “the Civil Service embraces all branches, subdivisions,
instrumentalities, and agencies of the Government, including government-
owned or controlled corporations with original charters.” As the Bank is not
owned or controlled by the Government although it does have an original
charter in the form of R.A. No. 3518,23 it clearly does not fall under the Civil
Service and should be regarded as an ordinary commercial corporation.
Section 28 of the said law so provides. The consequence is that the relations
of the Bank with its employees should be governed by the labor laws, under
which in fact they have already been paid some of their claims. (Emphasis
supplied)

_______________

22 G.R. No. 67125, 24 August 1990, 189 SCRA 14.

23 Under Section 3 of Republic Act No. 7169 which took effect on 2 January 1992,
the “operations and changes in the capital structure of the Veterans Bank, as well as
other amendments to its articles of incorporation and by-laws as prescribed under
Republic Act No. 3518, shall be in accordance with the Corporation Code, the
General Banking Act, and other related laws.”

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Feliciano vs. Commission on Audit

Certainly, the government owns and controls LWDs. The

government organizes LWDs in accordance with a specific law, PD
198. There is no private party involved as co-owner in the creation
of an LWD. Just prior to the creation of LWDs, the national or local
government owns and controls all their assets. The government
controls LWDs because under PD 198 the municipal or city mayor,
or the provincial governor, appoints 24
all the board directors of an
LWD for a fixed term of six years. The board directors of LWDs
are not co-owners of the LWDs. LWDs have no private stockholders
or members. The board directors and other personnel 25
of LWDs are
government
26
employees subject to civil service laws and anti-graft
laws.
While Section 8 of PD 198 states that “[N]o public official shall
serve as director” of an LWD, it only means that the appointees to
the board of directors of LWDs shall come from the private sector.
Once such private sector representatives assume office as directors,
they become public officials governed by the civil service law and
anti-graft laws. Otherwise, Section 8 of PD 198 would contra-

_______________

24 Section 3 (b) of PD 198 provides:

“(b) Appointing Authority.—The person empowered to appoint the members of the Board of
Directors of a local water district depending upon the geographic coverage and population
make-up of the particular district. In the event that more than seventy-five percent of the total
active water service connections of local water districts are within the boundary of any city of
municipality, the appointing authority shall be the mayor of the city or municipality, as the case
may be; otherwise, the appointing authority shall be the governor of the province within which
the district is located: Provided, That if the existing waterworks system in the city or
municipality established as a water district under this Decree is operated and managed by the
province, initial appointment shall be extended by the governor of the province. Subsequent
appointments shall be as specified as herein.
If portions of more than one province are included within the boundary of the district, and
the appointing authority isto be the governor, then the power to appoint shall rotate between the
governors involved with the initial appointments made by the governor in whose province the
greatest number of service connections exists.”

25 Baguio Water District v. Trajano,supranote 20; Davao City Water District v.

Civil Service Commission,supranote 3.
26 Morales v. People, G.R. No. 144047, 26 July 2002, 385 SCRA 259.

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378 SUPREME COURT REPORTS ANNOTATED

Feliciano vs. Commission on Audit

vene Section 2(1), Article IX-B of the Constitution declaring that the
civil service includes “government-owned or controlled corporations
with original charters.”
If LWDs are neither GOCCs with original charters nor GOCCs
without original charters, then they would fall under the term
“agencies or instrumentalities” of the government and thus still
subject to COA’s audit jurisdiction. However, the stark 27and
undeniable fact is that the government owns LWDs. Section 45 of
PD 198 recognizes government ownership of LWDs when Section
45 states that the board of directors may dissolve an LWD only on
the condition that “another public entity has acquired the assets of
the district and has assumed all obligations and liabilities attached
thereto.” The implication is clear that an LWD is a public and not a
private entity.
Petitioner does not allege that some entity other than the
government owns or controls LWDs. Instead, petitioner advances28
the theory that the “Water District’s owner is the District itself.”29
Assuming for the sake of argument that an LWD is “self-owned,”
as petitioner describes an LWD, the government in any event
controls all LWDs. First, government officials appoint all LWD
directors to a fixed term of office. Second, any per diem of LWD
directors in excess of P50 is subject to the approval of the Local
Water Utilities Administration, and directors
30
can receive no other
compensation for their services to the LWD. Third, the Local Water
Utilities Administration can 31require LWDs to merge or consolidate
their facilities or operations. This element of government control
subjects LWDs to COA’s audit jurisdiction.
Petitioner argues that upon the enactment of PD 198, LWDs
became private entities through the transfer of ownership of water
facilities from local government units to their respective water
districts as mandated by PD 198. Petitioner is grasping at straws.
Privatization involves the transfer of government assets to a private
entity. Petitioner concedes that the owner of the assets transferred
under Section 6 (c) of PD 198 is no other than the LWD

_______________

27 As amended by PD 768.
28 Rollo, p. 16.
29Ibid.

30 Section 13, PD 198.

31 Section 43, PD 198.

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Feliciano vs. Commission on Audit
32
itself. The transfer of assets mandated by PD 198 is a transfer of
the water systems facilities “managed, operated by or under the
control of33
such city, municipality or province to such (water)
district.” In short, the transfer is from one government entity to
another government entity. PD 198 is bereft of any indication that
the transfer is to privatize the operation and control of water
systems.
Finally, petitioner claims that even on
34
the assumption that the
government owns and controls LWDs, Section 20 of PD 198
prevents COA from auditing LWDs.—Section 20 of PD 198
provides:

Sec. 20. System of Business Administration.—The Board shall, as soon as

practicable, prescribe and define by resolution a system of business
administration and accounting for the district, which shall be patterned upon
and conform to the standards established by the Administration. Auditing
shall be performed by a certified public accountant not in the government
service. The Administration may, however, conduct annual audits of the
fiscal operations of the district to be performed by an auditor retained by the
Administration. Expenses incurred in connection therewith shall 35
be borne
equally by the water district concerned and the Administration. (Emphasis
supplied)

Petitioner argues that PD 198 expressly prohibits COA auditors, or

any government auditor for that matter, from auditing LWDs.
Petitioner asserts that this is the import of the second sentence of
Section 20 of PD 198 when it states that “[A]uditing shall be
performed36
by a certified public accountant not in the government
service.”
PD 198 cannot prevail over the Constitution. No amount of
clever legislation can exclude GOCCs like LWDs from COA’s audit
jurisdiction. Section 3, Article IX-C of the Constitution outlaws any
scheme or devise to escape COA’s audit jurisdiction, thus:

Sec. 3. No law shall be passed exempting any entity of the Government or

its subsidiary in any guise whatever, or any investment of public funds,
from the jurisdiction of the Commission on Audit. (Emphasis supplied)

_______________

32 Rollo, p. 644.
33 Section 6(c) of PD 198, as amended by PD 768.
34Supra, note 2.
35 Section 20 of PD 198, as amended by PD 768.
36 Rollo, p. 9.

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380 SUPREME COURT REPORTS ANNOTATED

Feliciano vs. Commission on Audit

The framers of the Constitution added Section 3, Article IX-D of the

Constitution precisely to annul provisions of Presidential Decrees,
like that of Section 20 of PD 198, that exempt GOCCs from COA
audit. The following exchange in the deliberations of the
Constitutional Commission elucidates this intent of the framers:

MR. OPLE: I propose to add a new section on line 9, page 2 of the amended
committee report which reads: NO LAW SHALL BE PASSED
EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS
SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS
OF PUBLIC FUNDS, FROM THE JURISDICTION, OF THE
COMMISSION ON AUDIT.
May I explain my reasons on record.
We know that a number of entities of the government took advantage of
the absence of a legislature in the past to obtain presidential decrees
exempting themselves from the jurisdiction of the Commission on Audit, one
notable example of which is the Philippine National Oil Company which is
really an empty shell. It is a holding corporation by itself, and strictly on its
own account. Its funds were not very impressive in quantity but underneath
that shell there were billions of pesos in a multiplicity of companies. The
PNOC—the empty shell—under a presidential decree was covered by the
jurisdiction of the Commission on Audit, but the billions of pesos invested
in different corporations underneath it were exempted from the coverage of
the Commission on Audit.
Another example is the United Coconut Planters Bank. The Commission
on Audit has determined that the coconut levy is a form of taxation; and
that, therefore, these funds attributed to the shares of 1,400,000 coconut
farmers are, in effect, public funds. And that was, I think, the basis of the
PCGG in undertaking that last major sequestration of up to 94 percent of all
the shares in the United Coconut Planters Bank. The charter of the UCPB,
through a presidential decree, exempted it from the jurisdiction of the
Commission on Audit, it being a private organization.
So these are the fetuses of future abuse that we are slaying right here
with this additional section.
May I repeat the amendment, Madam President: NO LAW SHALL BE
PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS
SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS’
OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE
COMMISSION ON AUDIT.
THE PRESIDENT: May we know the position of the Committee on the
proposed amendment of Commissioner Ople? MR. JAMIR: If the honorable
Commissioner will change the number of the section to 4, we will accept the
amendment.

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Feliciano vs. Commission on Audit

MR. OPLE: Gladly, Madam President. Thank you.

MR. DE CASTRO: Madam President, point of inquiry on the new
amendment.
THE PRESIDENT: Commissioner de Castro is recognized.
MR. DE CASTRO: Thank you. May I just ask a few questions of
Commissioner Ople.
Is that not included in Section 2 (1) where it states: “(c) government-
owned or controlled corporations and their subsidiaries”? So that if these
government-owned and controlled corporations and their subsidiaries are
subjected to the audit of the COA, any law exempting certain government
corporations or subsidiaries will be already unconstitutional.
So I believe, Madam President, that the proposed amendment is
unnecessary.
MR. MONSOD: Madam President, since this has been accepted, we
would like to reply to the point raised by Commissioner de Castro.
THE PRESIDENT: Commissioner Monsod will please proceed.
MR. MONSOD: I think the Commissioner is trying to avoid the situation
that happened in the past, because the same provision was in the 1973
Constitution and yet somehow a law or a decree was passed where certain
institutions were exempted from audit. We are just reaffirming,
emphasizing, the role of37the Commission on Audit so that this problem will
never arise in the future.

There is an irreconcilable conflict between the second sentence of

Section 20 of PD 198 prohibiting COA auditors from auditing
LWDs and Sections 2(1) and 3, Article IX-D of the Constitution
vesting in COA the power to audit all GOCCs. We rule that the
second sentence of Section 20 of PD 198 is unconstitutional since it
violates Sections 2(1) and 3, Article IX-D of the Constitution.

On the Legality of COA’s

Practice of Charging Auditing Fees
Petitioner claims that the auditing fees COA charges LWDs for
38
audit
services violate the prohibition in Section 18 of RA 6758, which
states:

Sec. 18. Additional Compensation of Commission on Audit Personnel and of

other Agencies.—In order to preserve the independence and

_______________

37 Record of the Constitutional Commission, Vol. I, pp. 606-607.

38 Compensation and Position Classification Act of 1989.

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382 SUPREME COURT REPORTS ANNOTATED

Feliciano vs. Commission on Audit

integrity of the Commission on Audit (COA), its officials and employees

are prohibited from receiving salaries, honoraria, bonuses, allowances or
other emoluments from any government entity, local government unit,
government-owned or controlled corporations, and government financial
institutions, except those compensation paid directly by COA out of its
appropriations and contributions.
Government entities, including government-owned or controlled
corporations including financial institutions and local government units are
hereby prohibited from assessing or billing other government entities,
including government-owned or controlled corporations including financial
institutions or local government units for services rendered by its officials
and employees as part of their regular functions for purposes of paying
additional compensation to said officials and employees. (Emphasis
supplied)
39
Claiming that Section 18 is “absolute and leaves no doubt,”
petitioner asks COA to discontinue its practice of charging auditing
fees to LWDs since such practice allegedly violates the law.
Petitioner’s claim has no basis.
Section 18 of RA 6758 prohibits COA personnel from receiving
any kind of compensation from any government entity except
“compensation paid directly by COA out of its appropriations and
contributions.” Thus, RA 6758 itself recognizes an exception to the
statutory ban on COA personnel 40
receiving compensation from
GOCCs. In Tejada v. Domingo, the Court declared:
There can be no question that Section 18 of Republic Act No. 6758 is
designed to strengthen further the policy x x x to preserve the independence
and integrity of the COA, by explicitly PROHIBITING: (1) COA officials
and employees from receiving salaries, honoraria, bonuses, allowances or
other emoluments from any government entity, local government unit,
GOCCs and government financial institutions, except such compensation
paid directly by the COA out of its appropriations and contributions, and (2)
government entities, including GOCCs, government financial institutions
and local government units from assessing or billing other government
entities, GOCCs, government financial institutions or local government
units for services rendered by the latter’s officials and employees as part of
their regular functions for purposes of paying additional compensation to
said officials and employees.
xxx

_______________

39 Rollo, p. 11.
40 G.R. No. 91860, 13 January 1992, 205 SCRA 138.

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Feliciano vs. Commission on Audit

The first aspect of the strategy is directed to the COA itself, while the
second aspect is addressed directly against the GOCCs and government
financial institutions. Under the first, COA personnel assigned to auditing
units of GOCCs or government financial institutions can receive only such
salaries, allowances or fringe benefits paid directly by the COA out of its
appropriations and contributions. The contributions referred to are the cost
of audit services earlier mentioned which cannot include the extra
emoluments or benefits now claimed by petitioners. The COA is further
barred from assessing or billing GOCCs and government financial
institutions for services rendered by its personnel as part of their regular
audit functions for purposes of paying additional compensation to such
personnel, x x x. (Emphasis supplied)

InTejada,the Court explained the meaning of the word

“contributions” in Section 18 of RA 6758, which allows COA to
charge GOCCs the cost of its audit services:

x x x the contributions from the GOCCs are limited to the cost of audit
services which are based on the actual cost of the audit function in the
corporation concerned plus a reasonable rate to cover overhead expenses.
The actual audit cost shall include personnel services, maintenance and
other operating expenses, depreciation on capital and equipment and out-of-
pocket expenses. In respect to the allowances and fringe benefits granted by
 the GOCCs to the COA personnel assigned to the former’s auditing units,
the41 same shall be directly defrayed by COA from its own appropriations x x
x.

COA may charge GOCCs “actual audit cost” but GOCCs must pay
the same directly to COA and not to COA auditors. Petitioner has
not alleged that COA charges LWDs auditing fees in excess of
COA’s “actual audit cost.” Neither has petitioner alleged that the
auditing fees are paid by LWDs directly to individual COA auditors.
Thus, petitioner’s contention must fail.
WHEREFORE, the Resolution of the Commission on Audit
dated 3 January 2000 and the Decision dated 30 January 2001
denying petitioner’s Motion for Reconsideration are AFFIRMED.
The second sentence of Section 20 of Presidential Decree No. 198 is
declared VOID for being inconsistent with Sections 2 (1) and 3,
Article IX-D of the Constitution. No costs.

_______________

41Ibid.

384

384 SUPREME COURT REPORTS ANNOTATED

Zamora vs. Caballero

SO ORDERED.

Davide, Jr. (C.J.), Puno, Vitug, Panganiban, Quisumbing,

Ynares-Santiago, Sandoval-Gutierrez, Austria-Martinez, Corona,
Carpio-Morales, Callejo, Sr., Azcuna and Tinga, JJ., concur.

Judgment and resolution affirmed, second sentence of Sec. 20,

PD 198 void for being inconsistent with Secs. 2(i) and 3, Art, IX-D
of the Constitution.

Note.—The exercise of the power of respondent Court of

Appeals, to decide administrative cases invoking expenditure of
public funds involves the quasi-judicial aspect of government audit.
(Uy vs. Commission on Audit, 328 SCRA 607 [2000])

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