Recently, the Commission on Audit (COA) En Banc affirmed that there was nothing irregular in Development Bank of the Philippines’ (DBP) sale of Philex Mining Corp (PMC) shares in 2009. Recall that the DBP Audit Team filed a notice of charge which alleged that DBP incurred a “loss of opportunity trading gain” of P412.50 million when it sold the PMC shares to DVRI in November 2009, given that 27 days later the PMC shares rose from its selling price of P12.75 per share to P21 per share.
Before proceeding, this writer discloses that he was once a DBP Executive Vice President who joined DBP way after the questioned transaction. In my former position, however, I learned about the many careers that were derailed by the charge and the negative morale effect of the very public case on the people inside the bank. It is also a fact that a junior officer tragically passed away, allegedly due to depression from “show cause” letters regarding said incident.
Without commenting on the case merits, it is established that the COA has decided that the difference in sale price is because of the volatility and speculative nature of stock market trading. The COA noted that despite the variance between the sale price in November 2009 and December 2009, DBP did not suffer an actual loss. Similarly, in 2014, the Sandiganbayan already threw out a related criminal case for alleged behest loans in connection with the sale of PMC shares.
It took 15 years to finally put to rest any question of irregularity. While the COA's decision provides some resolution, the case has already caused significant damage to affected individuals.
Another example is the accounting firm Arthur Andersen (AA) that was dissolved in 2002 following allegations related to the Enron scandal. In 2005, the US Supreme Court overturned AA’s conviction on the grounds of flawed jury instructions, suggesting that the legal process was not entirely fair. Although AA's role in the Enron scandal is undeniable, some argue that the consequences were overly severe and had broader negative impacts. The action of a few penalized thousands of innocent officers and employees—a question of proportionality. Some would argue that the Enron case was complex, and Anderson was scapegoated for broader systemic issues.
The issue of regulators and auditors imposing unfounded penalties is a significant concern, particularly when such actions irreversibly damage careers, reputations, and businesses. Accountability is a fundamental principle of justice, and the question of whether regulators and auditors should be held accountable for errors or overreach is both ethical and practical.
Regulators and auditors play a crucial role in ensuring compliance, integrity, and public trust across industries. They act as watchdogs to detect fraud, prevent malpractice, and protect stakeholders. Their authority allows them to investigate, impose penalties, and sometimes even revoke licenses or certifications. However, this power must be exercised judiciously and transparently because of its far-reaching consequences.
When regulators or auditors make errors, the consequences for the subjects can be severe. Consider the following consequences: First, reputational damage. A publicized penalty or adverse finding can irreparably harm an individual’s or organization’s reputation, even if later reversed. Second, financial losses can be substantial. Fines, legal fees, and lost business opportunities can have long-term financial implications. Third, the emotional and career impacts can be devastating. Professionals may lose their careers, livelihoods, and professional standing due to accusations later proven unfounded.
There is a compelling argument for holding regulators accountable when their actions are found to be erroneous or excessive. Individuals and organizations harmed by wrongful penalties should have avenues for compensation, akin to suing for damages in cases of negligence or malpractice. Regulators should be required to demonstrate due process, ensuring their findings are well-supported and fair before imposing penalties. Independent oversight bodies could review regulatory decisions to minimize errors and ensure fairness. Regulators should publicly acknowledge their errors, much like subjects are publicly penalized for wrongdoing.
The critical issue is how to balance authority and accountability. Regulators need sufficient authority to act decisively, especially in urgent situations. Excessive fear of being held accountable could result in regulatory paralysis, where they avoid taking necessary actions. Many regulatory issues involve complex and evolving facts, which can lead to genuine error.
Determining whether an error was due to negligence or unavoidable circumstances is often difficult. A fair and transparent process is essential to assess the circumstances of each case. Likewise, if regulators are overly penalized for their efforts, it may open the door for frivolous or retaliatory lawsuits, undermining their effectiveness.
Regulators and auditors must be held to high standards of accountability, just as the subjects they oversee are. While they are essential for maintaining order and trust, their authority must be exercised with care and responsibility. Implementing mechanisms for oversight, redress, and transparency can help achieve a balance. The aim is to ensure justice for all parties concerned.
(Benel Dela Paz Lagua was previously EVP and Chief Development Officer at the Development Bank of the Philippines. He is an active FINEX member and an advocate of risk-based lending for SMEs. Today, he 1 is an independent director in progressive banks and in some NGOs. The views expressed herein are his own and do not necessarily reflect the opinion of his office as well as FINEX.)