Should Incentives Continue In Income Tax Law?
Inadequacies In Contract Management
Bridging Fiscal Gap In Municipal Organisations
Audit Of Privatisation – An Australian Experience
The Art Of Facilitation
IT-Audit Strategy & Perspectives For The New Millennium
[Presentation made by Shri K. Subramanian, Advisor (IT) in the Seminar on IT-Audit held in China in Nov"99 ]
Shri V.K. Shunglu, Comptroller and Auditor General of India
addressing the participants of the International Training Programme on Infrastructure Sector and Audit Inaugural Address By The Comptroller & Auditor General Of India,
In The 46th International Training Programme On "Infrastructure Sector And Audit" Held On 10th November, 1999
Ladies and Gentlemen,
It gives me great pleasure to be here this morning to inaugurate the 46th International Training Programme on "Infrastructure Sector and Audit".
At the outset, let me extend to you all a hearty and cordial welcome.
The International Training Centre of the office of the Comptroller and Auditor General of India has been organising International Training Programmes in different areas of auditing and accounting since 1979. These programmes have provided a good opportunity to members of various SAIs to cover together and share their knowledge and experience in various fields of audit.
This programme, the last one in this millennium, would provide the participants with an understanding of functions, organisation and management of the Infrastructure Sector with particular reference to Transport and Telecommunication sectors and techniques adopted for their effective audit.
A good infrastructure is essential for economic and social development of any country. It provides vital links between centres of production and markets in economic sectors such as agriculture, industry, mining and tourism. It also generates significant direct and indirect employment opportunities and promotes growth of health, education, recreation and wide range of other social services. Infrastructure linkages between rural and urban area help to bring socio-economic change, transforming the community by providing better access to various public services.
As infrastructure development has been always directly linked to economic growth and poverty reduction, developing countries have made substantial investment in infrastructure in the last few decades thereby expanding access to services like telecommunications, transport etc. in rural areas. By its very nature of large scale requirement of funds as well as its imperative social and economic requirement, Government finance and policy have to assume an important role in infrastructure development. This automatically leads to the involvement of public auditors who have to ensure accountability for provision of efficient, economic and safe infrastructural services.
Infrastructure Audit can be regarded as a distinct discipline. It demands specialised knowledge of the operational environment, economics, engineering and technology, and skill in applying that knowledge in examining the working of a public undertaking providing the Infrastructure service. Depending on the size of such public undertaking, accountability of utilization of moneys by the management of the affairs of the undertakings has to be established. Government audit is an independent instrument to ensure such an accountability.
Performance appraisal of agencies dealing with Infrastructure development involves not only financial analysis, but also techno-economic and social considerations. The auditors ought to have the knowledge of the relevant technical aspects and of the techniques of socio-economic cost benefits analysis. Further, there should be a clear grasp of the environment in which these agencies operate.
In India, upto half a decade back, provision of services in telecommunication and transport sector were mainly the Government’s responsibility. However, the unmet and projected future demand for infrastructure services arising from the needs of a growing economy has necessitated private sector investment. The Government has redefined its role from that of an owner of assets and the sole provider of services to that of ensuring that infrastructure services are actually delivered in a desirable manner. At present, while public sector holds a virtual monopoly in rail services, it shares responsibility with the private sector in road, air, water, transport and telecom services. Regulation of transport systems and telecom services and policy planning for these sectors remain with the Government.
The role of audit in India, especially with relation to telecom and transportation sector, is thus evolving keeping in view the changed scenario. While audit of financial statements of Government and public sector undertaking relating to Infrastructure development and their transaction audit continue to play an important role, efficiency cum performance audit involves new areas like investments in infrastructure, pricing of services, socio-economic cost benefit analysis, technological breakthrough, user satisfaction etc. It has, therefore, become necessary for auditors to equip themselves with the knowledge and skills specific to infrastructure sector.
Thus training is essential to equip the auditors with the knowledge and skills specific to the audit of infrastructure facilities in all its variety and complexity in the modern context. Training should be designed to provide inputs on specific areas like feasibility of conducting performance audit of the entire sector, horizontal audit examination of infrastructure systems, audit of relevant regulatory authority, energy audit techniques, privatisation of infrastructure facilities and service with reference to accountability mechanism etc.
I hope this training programme will provide you with some of the skills necessary for such audit. I notice from the training schedule that a number of experts in the field of road transport, ports, shipping, air services and telecom sector are scheduled to talk to you on various topics. I hope you will find their presentations as well as interaction with them useful and interesting. Field visits will help you understand the operational aspects of infrastructure facilities. Simultaneously presentation of individuals country papers will provide a valuable insight about each other experience /practices adopted in infrastructure audit.
I hope that you will use this opportunity not only to update your skills and knowledge but also find time to do some sightseeing.
I am happy to inaugurate this training programme and wish you all an enjoyable stay in this country.
Former Chairman, CBDT
There are always demands for reducing the tax rates, but when there is any suggestion for eliminating or reducing fiscal concessions in taxation laws, generally, there are strong
re-actions to such a move. Very few welcome any such proposals from the point of view of bringing simplicity in the tax system and ensure equity. However, the majority feels that these are the best ways for implementing Government’s fiscal and economic policies. Long gone are the days, it is said, when taxation used to be only a method for collection of Government revenues. It is now a very potent measure with the Governments for, removing distortions in incomes and wealth and for ushering in socialistic patterns in the country. However, the hard fact is that plethora of direct tax concessions for certain purposes and the safeguards provided against their misuse have greatly complicated the tax laws.
Tax incentive packages have been widely used in a variety of forms for varied purposes in different countries. Such benefits have been provided for encouraging various desirable activities despite the skepticism of many fiscal experts over their efficacy. In a number of developing countries, incentive legislation represents a major legislative effort to hasten industrialisation and economic development. Incentives are one of the various ways of providing governmental financial assistance - the other being direct grants, loans, interest, subsidies, guarantees for payment of loans/interest etc.
Some countries have been making experiments with incentive provisions. For example, the British Government for some years used an approach of investment credit to encourage the acquisition of machinery and equipment. The Labour government subsequently dropped the tax technique and substituted direct cash payments. The conservative government, then dropped the direct grants and substituted direct cash payments. Thus skilled tax technicians and budgetary experts can take any expenditure and devise a budgetary expenditure approach to serve the same goals as a direct expenditure. Broadly speaking, a tax incentive could be described as a mechanism for providing tax relief for undertaking certain activities or behaviour, or even for discouraging these. In actual effect it is no different from a cash subsidy or grant. Referring to concessions permissible for charitable contributions under the US Internal Revenue Code, the House Ways and Means Committee in one of its reports has made the following observation :
The exemption from taxation of money or property devoted to charitable and other purposes is based upon the theory that the Government is compensated for the loss of revenue by its relief from financial burden which would otherwise have to be met by appropriation from public funds and by the benefit resulting from the promotion of the general welfare."
Income Tax Laws have become a major instrument for promoting political, social and economic policies in almost all the countries of the world. Starting from the necessity of collecting revenue, such laws have developed into a mechanism for varied objectives viz. equitable distribution of income and wealth, promotion of economic and industrial growth, diversion of flow of resources to the less developed areas, creation of employment avenues, rural and urban development, control of inflation and promotion of savings and investments, encouragement of exports, development of small scale industries, promotion of scientific and other researches, development of agriculture, horticulture, handicrafts, dairy farming and various other such activities. These objectives are sought to be achieved by grant of tax concessions. These take the form of exemption from tax (full or partial), deductions, deferrals, tax credits, tax holidays etc. Sometimes, preferential rates of tax for some classes of incomes or categories of tax payers are also provided for. Provision for such concessions are generally made by amending the tax laws of the countries and make these an integral part of the tax system. Exemption from tax of income from newly constructed residential units for sometime upto certain limits, exemption of interest income from some specified categories of investments, allowance for development of export markets, accelerated depreciation, development rebates and allowances, tax holidays for new industrial undertakings are some of the areas where provision has been made in the Indian Income Tax Act to achieve the above referred objectives.
Such exercises for achieving the targeted goals are not without cost. These indicate conscious or deliberate departures from the normative concept of income and to the extent these relieve the taxpayers from the liability to pay tax, their effect is no different than a direct expenditure or subsidy from the Government’s side to achieve such objectives. Thus such concessions result in considerable tax give-aways without exact quantification of the loss of revenue suffered by the States.
In India incentives, allowances and concessions are granted to various taxpayers and for different activities and purposes. Some of the incentives are available only to the resident Indians and resident Indian companies, whereas certain other incentives are available to non-residents. Some examples of these in the Indian context are :
These include tax credits at prescribed rates upto specified limits in respect of Life Insurance Premiums, contribution to Provident Annuity and Superannuation funds, purchase of National Savings Certificates, etc.
These, inter alia, include :
Relief in computation of income in respect of newly constructed residential units [Sec. 23(1)].
Computation of Annual Letting value in the case of owner occupied properties [Sec. 23(2)].
Allowance in respect of expenditure on Scientific Research [Sec. 35].
Allowance in respect of expenditure on acquisition of patent rights or copyrights [Sec. 35-A].
Deductions of :
The above enumeration is merely illustrative, not exhaustive. There are various other categories of reliefs which apply to income from capital gains, personal incomes like salaries, wages, incomes from professions and callings, foreign income, non-residents etc. In view of space limitations it is not possible to cover all these in this article.
A perusal of the list of items herein before enumerated shows that all such concessions have become a normal part of the tax system though for certain categories of reliefs, a subsidy or a grant could be easily worked out and dispersed without complicating the tax system. However, the votaries of the tax concessions claim that achieving certain objectives through tax incentives, exemptions and deductions is more efficient than direct expenditure.
Tax incentives produce the same financial strain on the economy as direct expenditures, but former are preferred, because these are taken to be not a use of the government funds directly but merely tax reduction techniques. This line of reasoning is not correct. Proceeding on the assumption that both the types of expenditure tantamount to the use of the government funds, it would be useful to examine their respective merits and demerits.
Direct expenditures are easily identifiable and easy to work out, while it is sometimes hard to recognise a tax expenditure item by looking to the provisions of the tax code. These items of expenditure are embedded in the tax system. The administration, accountability and audit of such expenditures, in many cases, become a nightmare. Reports of the Comptroller and Auditor General of India on the audit of Union Government's Revenue Receipts (Direct Taxes) indicate that a large number of mistakes committed by the departmental officials relate to such benefits.
Further, the tax department is saddled with the responsibilities which belong to other departments of the Government and has to take the credit or blame for the success or failure of the projects with which it is least concerned in its day to day working and is not equipped for monitoring these. For example, it should not be the concern of the tax department to provide incentives for education, health, family planning, industrial development and the like. The concerned departments should take responsibility for such matters through direct spending programmes.
In order to benefit from tax relief, it is necessary to have tax liability to be reduced, whereas a direct grant can be made available irrespective of income. Further, the quantum of relief in case of direct spending does not depend on the income earning capacities of the beneficiaries. The amount of relief in the case of direct spending, will not differ in the case of two taxpayers whose tax brackets are different (say 10% in one case and 30% in another). The benefits automatically increase or decrease as income tax rates rise or fall because of various policy considerations. A rupee will be a rupee for all categories of tax payers (and not more to those with higher incomes) if direct expenditure approach is followed.
Incentive provisions often lead to under utilisation of resources. For example, tax reliefs for owner occupied houses may encourage people to build bigger houses than they need. With less tax relief, but with the same total of governmental relief, it may be possible to have a large number of houses for overcoming the housing shortage.
Commenting about Development Rebate in the Income-tax Act, Shri Boothalingam, in his report concerning Direct Taxes has said that this relief was prone to create a tendency to use capital too liberally, even wastefully and it encourages people to get a particular function performed by capital equipment rather than by some other means which might have been more economical but for this particular tax incentive. What has been said about development rebate (since discontinued) applies with equal force to the other relief provisions.
Tax incentives are generally subject to lesser parliamentary controls than direct expenditures - both when these are provided for and in the matter of periodical reviews. Constraints of parliamentary procedure make it difficult to debate demands for the restriction or abolition of a relief or the suggestions that the justifications for these should be re-examined. The result is that once a tax relief finds its way on the statute book, it becomes a part of the tax laws and escapes periodical scrutiny. In contrast, the direct spendings and subsidies are subject to annual reviews.
Because of the system of tax incentive, occasionally, tax reform and other socially desirable objectives get extricably mixed up with the Government’s budget policies and do not receive due attention. Similarly, when cuts are thought of for effecting economy in expenditure, attention is concentrated mainly on direct outlays. The fact that budget receipts could be increased by curtailing some of the reliefs and exemptions is generally lost sight of. In the matter of allocation also, the direct spending programmes compete for revenues left after all the tax incentives have been taken care of !
Occasionally, investment decisions get distorted because of tax incentives and reliefs. These also fail to take into account the effects of inflation. Direct subsidies and grants in many cases constitute income in the hands of the beneficiaries who are required to pay tax to the government on such receipts. This situation does not arise in the case of tax benefits.
Special provisions for exemptions/reliefs in tax code are justified on many grounds. It is claimed that through tax preferences, private sector could be encouraged to undertake expenditure which may otherwise be required to be made by the Government (See observations relating to charitable contributions -supra). Secondly it is said that by giving incentives, preferences through the tax system, decision making is left to the private sector and this is likely to lead to increased innovation and diversity in economy. (It is however not correct to say that the same results cannot be realised by direct expenditure also).
It is also argued that the handicap in the capital formation by government’s entering into the capital markets and increasing the cost of capital raising could be minimised or off set by giving tax reliefs. This is hardly a convincing argument.
The most canvassed and convincing justification for tax benefits is administrative convenience and simplicity in working. A direct programme generally requires an application to the Government for a grant and wait for approval and payment. After the money has been received, the recipient is required to keep detailed account of the same and satisfy the Government that it has been rightfully utilised for the purpose for which it was granted. The Government also requires manpower to process such applications and ensure that the money is properly utilised. This costs time and money.
In contrast, tax incentives do not need any such detailed exercises. The taxpayers avail of the benefit by making some entries in their records and tax returns. In some situations, they are required to get their accounts audited by Chartered Accountants. Benefit is realised fast - in fact it is realised even before the Government has an opportunity to scrutinise the claim because the payment takes the form of a reduction in the tax due or an increase in the refund due to the tax payers. The Government is not required to employ any extra staff to audit the use of the facility provided for. It is done by the officers of the Income-tax Department who in any case are required to do the job irrespective of the fact whether relief is admissible or not. Thus, the taxpayers additional botheration for getting the benefit and the Government’s cost of administration is practically negligible. The Government’s interference in the beneficiary’s business or personal life is almost nil compared to that involved in most direct programmes.
The above argument is not without flaw. In tax benefits, the element of selectivity i.e. only the deserving ones should get the benefit gets sacrificed. Further, because of the complexities in many cases, considerable costs are incurred by the taxpayers and the Government. Where tax expenditures abound, professional tax advisers get a hay ground. It is not, therefore, surprising that in many cases in India that are litigated before the Tax Tribunals, High Courts, and the Supreme Court, the issues involved relate to incentives, exemptions and deductions. If direct expenditure approach is followed, it would lead to saving of time, money and efforts leading to their better utilisation.
The issue may now be examined from the angle of tax policy considerations. A tax system has to be as fair as possible, as simple (and certain) as possible and impose minimum restraints on economic growth at the same time foster maximum economic stability. But these objectives have inter-se conflicts. For example, a simple tax system (say taxation of all at a uniform rate) may not be fair. Likewise, provisions of law intended to facilitate economic development are being criticised for making the tax system complicated. Deductions and exemptions allowed under a tax system are intended to ease the burden, and bring it more in conformity with the concept of ‘ability to pay’, yet every deduction and exemption complicates the law. The deduction for charitable contributions are consistent with our tradition of private philanthropy and necessary to sustain charitable activity, but this has been subject to great misuse with the result that the provisions of the Income-tax Act dealing with charities are the most complicated provisions in the Act and have been changed umpteen times since these were brought in the Income Tax law.
The incentives also go against the concept of neutrality in a tax system. Differential rates, special depreciation and investment allowances, preferences to particular trade, industry or economic activity, forms of investment, savings all go against the concept of neutrality. However, with high tax rates and large tax burden, complete neutrality in the tax law is impossible to achieve. Hence for such considerations there cannot be a clear cut yes or no to the question whether deductions, incentives and exemptions should or should not remain in a tax system.
It would be over simplification to say that direct spending method can be a solution to all the problems associated with incentive deduction provisions. What is needed is a proper balance. Direct expenditure in certain situations may not be administratively feasible but this does not justify indiscriminate use of tax incentive techniques on such pretexts. Temptations to resort to reliefs through tax system create an illusion of lower government spending or to manage with lesser financial controls and need to be discouraged. The criterion in judging the suitability of a particular proposal for relief, exemption, exclusion etc. need to be examined from the point of view of direct spending viz. whether in the alternative the government is prepared to spend the amount covered by the tax expenditure proposal as an outright grant, subsidy or expense? If the objective sought to be achieved can conveniently be reached by direct expenditures, then the later course should be preferred. Complex problems relating to reliefs, should, as far as possible, be avoided in order to save the tax system from getting complicated. It should be recognised as to what can and what cannot be achieved through the tax system.
Preferably, programme relating to other ministries should not be routed through the tax system because besides complicating the law, there is no machinery for checking whether the intended object is being achieved or not. The best example of this is earlier Section 35-B (since deleted) which provided for weighted deduction relating to expenditure on export development without there being any machinery to check up whether requisite foreign exchange due to the exports is really flowing to the country. Instances were a galore, where inflow of foreign exchange by way of sale proceeds was far less than the outflow by way of foreign tours, import costs etc. Similarly there is no evidence in concrete terms about the efficacy of present section 80-HHC. Hence unless absolutely necessary, the other ministries responsibilities should not come to the shoulders of the Income-tax Department through the tax system.
In the most important conditions for a successful co-existence of the two processes are :-
In future when tax incentives are considered necessary, it would be useful to set a date of review and report regarding the working of the programme at the time of the drafting of the provision itself.
And above all, the Parliament must scrutinise the financial effects of such proposals and justification for their continuance with the same vigilance, zeal and interest as it does in the case of direct spending proposals. It should undertake a regular review of tax reliefs considered as equivalents of direct public expenditure.
Viewed from the point of view of benefit to the economy and various sectors of industry, considerable use of incentives in a tax system does not seem justified. A realistic view in the matter seems necessary and the policy decision contained in the Long Term Fiscal Policy document of 1985 of minimising the tax benefits needs to be implemented with all seriousness. It is a pity that the process initiated of cutting down exemptions and deductions initiated through the budget exercises in eighties continued only for 3 years and then the process was reversed with more firmness even though, the Finance Minister in his budget speech for the year 1983-84 observed that the corporate tax structure is riddled with a large number of different kinds of deductions whose aggregate effect is to complicate tax administration, provide opportunity for misuse and reduce the growth of revenues. He, reviewed various deductions and withdrew weighted deduction for expenses in the case of a company or a cooperative society using products of agriculture, animal husbandry, dairy or poultry farming as raw material. The relief relating to approved Rural Development Programmes and some other tax concessions were also discontinued.
The same exercise was repeated during 1984-85 budget. The Finance Minister stated that expenditure based concessions were found to lead to a tendency to inflate expenditure and hence these should have no place in the country’s tax system. Therefore, he withdrew all weighted deductions as were available under different provisions and also withdrew exemptions available under Sections 33-B, 35-C, 80-CC, 80-D and 80-E. The quantum of reliefs available under Sections 80-M, 80-N and 80-O were also reduced (subsequently in the Finance Act, the benefit of section 80-CC was continued upto 31.3.1987). Similar views have been echoed in the Finance Minister’s speech for the year 1985-86 where also expenditure based concession have been considered undesirable.
It is time that a policy decision in this regard is taken by the Government which would not only streamline the tax system but would simplify and rationalize it.
- by R. Ramanathan
1. Procurement is a major activity in Government. In India, Government happens to be the single largest buying party with heavy public expenditure most of which devoted to procurement; the economy of the country largely depends upon the levels of public expenditure and the level of Government procurement. The major contracting parties in the Government are Director General [Supplies & Disposals], Ministry of Defence, the Indian Railways and the various public sector enterprises. The Government has laid down exhaustive Rules & Regulations covering all aspects relating to contracting and contract implementation. Nothing can be bought, except petty purchases, without entering into a formal contract with the vendors.
2. The Government contracts are a class by themselves. Most of the contract conditions are standardised and are attached to the contracts as annexures in a standard format. Most of these terms and conditions are held non-negotiable and the vendors have no option except to accept them without any change. In fact, these terms and conditions are actually attached as part of the tender documents or the Request for Proposal. However, the foreign contractors like to bring their own terms and conditions which are to be negotiated keeping in view the Government guidelines. Mutually acceptable terms and conditions are agreed upon after intense negotiations on a case by case basis. In such cases, it is the package of the entire deal that becomes relevant instead of individual conditions of the contract, so long as these conditions do not conflict with the general guidelines given by the Government, the Reserve Bank of India and other agencies. In the case of contracts which are developmental in nature [i.e., an item has to be made for the first time after a due process of development given the broad specifications], whether developed in India or abroad, the terms and conditions of these contracts have to be negotiated in each case and agreed upon. While the standard terms and conditions may apply mostly, there may be some clauses which may not be totally relevant to these types of developmental contracts.
3. Despite the plethora of Rules, Regulations, Manuals that exist governing Government contracting, things do go wrong in many cases. The reasons are not far to seek. In many cases, the Rules are violated either through ignorance or through willful negligence. A too literal interpretation of the Rules also leads to unnecessary conflict with the contracts. In such cases the spirit behind the Rules is forgotten. The anxiety not to err often drives such an approach. But in most cases the mismanagement is due to sheer incompetence.
4. Some of the more important inadequacies found in Government contracting and contract implementation are discussed below :
(i) Delayed payments : This is common cause for complaints. The vendors genuinely feel that their payments are delayed, sometimes due to systemic factors and sometimes deliberately. The vendors uniformly build cushion in their prices against delayed payments. It is said that in the contract prices 95% accounts for all expenses including profit and other cushions for delay. The rest 5% to be released by the payment authority as a final payment is not even planned as a receipt by the vendor. If the 5% payment is released, it is considered as a bonus. This is a very unsatisfactory position wherein Government is forced to pay in all cases more money in contract prices, in view of the overall inefficiency in the payment procedure. This can be and should be corrected by suitable administrative action.
5. Given above are only a few of the many factors leading to poor contracting and contract implementation in Government departments. The list is endless. Given below are a few actual cases taken from the various Audit Reports issued by the CAG of India to illustrate some of the points brought out above :-
There has been a phenomenal increase in number and size of urban centres both demographically and physically. From 25 million people in 1901, it has increased to 217 million in 1991 census which is projected to reach 550 millions by 2021. Number of urban settlements have only doubled between 1901 and 1991. Urban infrastructure is woefully inadequate in respect of waste water management and solid waste management etc. which is resulting in air pollution, water pollution and noise pollution. Increasing urbanisation is the result of migration of people to urban centres in search of livelihood and also cultural sanskritisation. Since the urban centres provide 50% of the GDP, it is imperative that efficiency of urban centres is maintained by providing proper infrastructure. Modern urban cities are sustained because of provision of basic infrastructure. Even parts of the cities which once had booming real estate value decline in estate value because of deteriorating infrastructure. Primary infrastructure refers to water supply, sewerage, solid waste disposal, transport and power etc. and fire station, gardening, library, and museum etc. refer to secondary infrastructure. Infrastructure provision includes providing, operation and maintenance of infrastructure. Infrastructure needs of the city also change with the change in technology as in change from manufacturing to information economy.
The provision of this infrastructure requires massive investments of funds. Otherwise, the municipalities are likely to be ensnared in the low level equilibrium trap which is a cyclical trap of low investment to low satisfaction to low level of willingness to pay to low recovery. As per one estimate for the period 1995-2005, Rs.2800 billion is needed for providing civic amenities. Mobilisation of resources of this astronomical magnitude, has become a major worry of urban planners.
Sources of Municipal Finance are municipal taxes, shared revenues, user charges and fees, grant-in-aid and borrowings. Where the benefits of a local service are measurable and accrue to identifiable individuals, user charges should be the source for financing. Where identification of beneficiaries and measurements of benefits is difficult as in traffic control and general administration, resort should be made to taxes on local residents. Inter-government, fiscal transfers are the source for social services like health, education, environment, the benefits of which spill over to neighbouring jurisdiction. For financing long term capital infrastructural projects, long term borrowings should be resorted to.
Following patterns are noticed. There is vertical imbalance as the municipalities are heavily dependant on transfers from higher level of governments leading to control by higher governments. High yielding taxes are seldom assigned and grants are mostly negotiated. There is horizontal imbalance between municipalities of different sizes as their access to resources is not same. There is municipal revenue mix of taxes, transfers, user charges and borrowings. Municipalities are also plagued by systemic inefficiency in the shape of under-exploitation of own resources and high administrative and revenue collection costs.
The different taxes which are levied are Property Tax, Octroi, Advertisement Tax, Theatre Tax, Tax on Vehicles and Animals and Duty on Transfer of Property.
The municipal taxes are the major source of municipal finance. While choosing municipal taxes, the following points are to be kept in view :
Property Tax is the mainstay of municipal finance allover the world. It originated in British Rule with the Charter Act of 1793. It is a tax on immovable or tangible real property like land, buildings and permanent improvements. It refers to several imposts like General Property Tax, Water Tax, Sewerage Tax, Conservancy tax, Latrine and Scavenging Tax, Lighting Tax and Fire Tax. Property Tax is a percentage of the rateable value of the land and buildings.
Rateable Value means the annual value of the land and buildings in accordance with the provisions of the relevant act as the base for the purpose of levying the property tax. The annual value can be fixed either on the basis of rental value method or on the capital value method.
For discharging certain State Government responsibilities assigned to the municipalities and to enable the municipalities to have a share of some high yielding taxes administered by State Governments, revenue sharing is resorted to. It is also presumed that state agencies are more efficient in collection of taxes than the municipal authorities. The various taxes shared are entertainment tax in Greater Bombay, Motor Vehicle Tax in Delhi, Entry Tax in Calcutta and Duty on Transfer of Property in Chennai.
After enactment of the 74th Constitution Amendment Act, which enjoins constitution of Finance Commission, the sharing is done as per recommendation of the Finance Commission and has ceased to be discretionary.
User Charges are levied in case of benefits and services whose beneficiaries are readily identifiable. Service fees are levied performing services such as registration and supply of a copy of a document, license fees on business and vehicle etc. Public Prices are voluntary payments by private individuals for purchase of goods and services provided by the government. Special benefit taxes like Fuel taxes on road users are levied on benefits received from tax payers. Fees like Tehbazari are levied on vendors who use municipal area for selling their wares. The various users charges are : Water Charges, Sewerage Charges, Slaughter House Fees, Car Parking Fees etc. In user charges, the prices should be set at market levels equal to cost of supply and poor should be subsidised separately from separate sources.
Grants-in-aid is given by higher governments for performing agency function like Primary Education, Preventive Health Care and Environmental Programmes. Equalising grants are given to correct fiscal imbalance between municipalities. This reflects the desire of the State Govt. to take care of services which spill over to neighbouring jurisdiction of the municipalities and also to make use of the common taxes without assuming direct responsibilities. The various grants given are : Primary Education Grant, Water Supply Sewerage Grant, Compensation for Terminal tax etc. The grants are general purpose transfers or specific purpose transfers.
Municipal authorities resort to borrowings for implementing capital inventive projects, the benefit of which last over a relatively longer period of time, such as public utility, roads etc. These loans are from higher level of governments or as borrowings from the market by way of municipal bonds, debentures and other instruments which can be guaranteed by the higher government.
Municipal bonds are either general obligation bonds or revenue bonds. In general obligation bonds, the revenue collections are kept in an escrow account and supervised by an independent trustee. Borrower municipality gets a lien on the accounts only after debt-servicing requirements have been met. Revenue bonds, which are project specific, are secured by user fees or service charges paid by the users of the urban infrastructure facility e.g., tolls collected from a highway or drinking water facilities.
For credit rating of municipal body, legal and administrative framework of the municipality, economic base of the service area, details of municipal finances, the debt profile and political risks etc. are taken into account. The Corporations of Ahmdabad, Pune, Mumbai and Vijaywada have floated municipal bonds of Rs.100 crores, 200 crores, 25 crores and 30 crores respectively.
For bridging fiscal gap, apart from raising revenues and effecting economy in expenditure, there has to be increased transfer from higher governments. Other avenues could be by reducing municipal responsibilities or by scaling down municipal service norms.
The municipal organisations may be allowed to float municipal bonds. The municipalities may economise expenditure by use of innovative technology, privatising services like water supply, sanitation, maintenance of parks, education etc. The municipalities should go for higher resource mobilisation by imposing new taxes like toll tax, land misuse tax, night parking fee, tax on floating population etc. The property tax collection has to be streamlined by improving the tax collection ratio and by a judicious mix of incentives and penalties. The tax base has to be widened by making survey of properties.
Information technology has changed the face of the entire world. To attract investments from multinationals, municipalities will have to go the e-way by providing infrastructure for telecommuting, intelligent buildings, e-commerceand home offices by making massive investments in e-infrastructure apart from making investments for their obligatory functions like sewerage, scavenging and checking of dangerous diseases etc. The choice for them is to generate resources and go on e-path or languish in bye-lanes of progress as blundering mastodons.
Across the western world over the 1980s, macroeconomic policy, which traditionally covers budget deficits, expenditure and tax reforms, did not live up to the claims of most of its academic advocates. As a result, the 1990s have seen much greater emphasis placed on microeconomic policy and reform.
Microeconomic reform involves a panoply of measures to improve the efficiency of both public and private sectors. Its aim is to make products more competitive on world markets and thereby reduce current account deficit and foreign debt and at the same time make the country’s locally produced goods and services more able to compete against imports. More specifically microeconomic reform is aimed at increasing all round efficiency.
The objectives of privatisation by the Commonwealth/National Government in Australia have been :
Privatisation by the Commonwealth Government have ranged over nearly the whole gamut of economic activity ranging from aviation and telecommunication services to defence properties and have included :
(The sale of the airport leases is to be done in phases and out of the airports, the Federal major airports of Melbourne, Sydney, Brisbane, Perth and Adelaide have been identified for the Phase 1 sale. However, Australia’s most important airport at Sydney would not be sold under the environmental issues unique to the airport have been resolved).
The State Governments have also embarked on various privatisation programs ranging from power generation projects to transport services etc.
A notable feature of the Australian Privatisation Program has been that the Government embarked the exercise with the profit making enterprises first. This enabled creating an all round favourable and positive environment towards the privatisation objectives of the Government.
The methods of privatisation have been varied ranging from trade sales to public share offers. The sale in the case of Moomba to the Sydney Gas Pipeline was a trade sale whereas the sales in the cases of CSL Ltd. (1994), Qantas (1995) and the Commonwealth Bank of Australia (1991, 1993 and 1996) have been by way of share offers on the Australian Stock Exchange.
The sale of the Commonwealth’s shareholding in Qantas Airways Limited which was one of the earliest successful sale completed by the Commonwealth by way of public share offer, fetched around $ 1.45 billion to the Government. The sale comprised two components, trade sale of 25 percent shareholding to British Airways and a public offering of the remaining 75 percent. It was a complex and difficult task as it was conducted in a domestic market which had little experience in airline equities and in a period of volatility in world share markets.
The sale of CSL Ltd. was a comparatively smaller one, with a gross realisation of $ 299 million, and the same was completed with a 100 percent offering of the share at a constrained offer price structure with a predetermined price range.
The sale of the Commonwealth Bank was a more complex one, as the disinvestment of the final tranche of 50.4% of the Commonwealth’s equity interest, involved a buyback by the Bank of 100 million shares and a public sale offer of the remaining shares. The public offer was through an open tender realising $ 4.2 billion with offerings in the domestic and international markets.
Until 1996, the major Commonwealth Sales were conducted by the two Task Forces set up by the Government within the Department of Finance. In Jan 1996 the Government set up a new agency to take on the responsibilities for future sales, the Office of Asset Sales, which is also a part of the Finance Portfolio. This agency is planned to be a smaller one, and keeping in line with the recent trends in most Government Agencies to contract out, the Office of Asset Sales would also be contracting out most of the sale functions. Therefore, the Audit of Privatisations would also have to cover probity aspects in contracts with third parties.
The methods of privatisation could be by way of public offering of shares, private sale of the Asset, Management and employee buyout, Contracting out and leasing, though public offering of shares and outright sale, either by open tender or to a selected few are the methods mostly resorted to by Governments all over.
Valuation of a Government asset/business is a complex and particularly difficult
process especially if the enterprise is unique or if the technology is changing rapidly.
There are a number of ways of estimating the market value of the enterprise, the most commonly used are:
The estimate of discounted earnings depends on projected cash flows and the terminal value of the enterprise, at the end of the projected period. Difficult choices need to be made as to the likely future demand for the enterprise’s output, its pricing policy, the behaviour of the major costs, the projection period and the appropriate discount rate. If the future earning are uncertain and the enterprise has a record of poor financial performance, an asset based approach to valuation will be more appropriate. In this method, the depreciation policies, incomplete record of the stock of assets, obsolency, remaining life and replacement cost of the assets would be some of the difficulties to be encountered.
6. Role of the Australian National Audit Officer (ANAO)
A. Mandate of the Auditor General
The Auditor General is appointed to audit and report to the Commonwealth of Australia on the activities of Commonwealth entities authorities, companies and their subsidiaries.
The Auditor General is accordingly responsible for
A. Mandate of the Auditor General
In keeping tune with the mandate, the ANAO does not comment or question policies or policy matters of the Commonwealth. Therefore in the privatisation audits also the Auditor General does not comment on the policy decision of the Government to privatise any business or service. The audit is generally taken up only after the sale process is completed and once the business enterprise or the entity has passed into majority private ownership the Auditor General has no further role with regard to the financial statement audit and or performance audit of the privatised entity.
B. The ANAO approach for Privatisation audits
As a policy matter, the ANAO does not take up the audit of the sale until it is complete. The sale is said to be complete when money changes hands or when the contract is finalised. This approach is adopted to avoid any problems of breach of confidentiality of documents or information.
The objectives of privatisation audits are to form views to ensure that :
It can, therefore, be concluded that the focus of the audit scrutiny has been to examine the efficiency of the sale process to ensure maximum gains to the Government. The costs of the sale and future risks, if any, to the Commonwealth as a result of the sale have been specifically examined. The after effects \ results of privatisation are not examined by the ANAO.
Components Of The Privatisation objectives
(i) Net return to the Commonwealth
(Iii) Future repercussions
(Iv) Protection of post sale rights
The audit criteria which have been developed by the ANAO for the conduct of privatisation audits are :
7. Lessons For Audit In Indian Context
During the course of the attachment with the ANAO, I made a detailed case study of the sale of Commonwealth Serum Laboratories (CSL). The lessons to be drawn from the Australian experience are equally relevant for partial disinvestment programme which has been and in all probabilities could be the method of privatisation for the Central and State Government PSUs in India.
In my opinion the overall lessons to be drawn from the Australian experience are those of the extensive preparations made by the Government before the sale of the asset, clearly defined objectives of the sale, professionalism of the exercise and the transparency with which the entire sale process was completed.
In assessing the achievement of the sale/disinvestment objectives it is important and necessary to examine whether :
The above components of the privatisation objectives are very relevant and have to be kept in mind by the Sale team before selling/disinvesting the asset without which maximisation of benefits to the Government, would be the first casualty.
b) Movements of the share prices after the sale
In sales of the GBEs in Australia, by and large the share of the GBEs sold did not show any abnormal increases on subsequent trading on the Australian Stock Exchange. This indicates extensive preparation undertaken before the sale to ensure that the valuation of the shares was in tune with the underlying economic indicators. This ensured that there was no volatile movements in the share prices after the sale and no undue loss was caused to the Government.
c) Post sale indemnities/guarantees
Another particularly important lesson to be drawn from the Australian experience is of post sale indemnities/guarantees given by the Government. The ANAO specifically examined this aspect to see whether such guarantees were given after a well informed conscious decision. Audit could examine whether such guarantees were indeed warranted in the first place or whether such guarantees could be given by other risk sharing institutions like Insurance etc.
d) Consideration of views/opinion of all interested parties
Audit is to see whether views/opinions of all interested parties to the sale were given their due weightage and if the compelling reasons to discard the views were recorded by the Sale team. It would be useful to recollect here that in the very first disinvestment programme of the central PSUs undertaken by the Government of India, the views of the Administrative Ministry and the PSUs were brushed aside by the Sale Authorities. This was one of the reasons for the under realisation of the disinvestment proceeds to the Government.
"The only thing permanent is change" is an age-old saying. How true! Globalization, Information technology and shrinking distances are breaking the traditional modes of business. Any country or organization, which misses the bus, would become part of the history. Places in this milieu is the watchdog called auditor. This, coupled with the public expectations, active media and knowledge revolution, has brought new challenges to his profession.
The standard "tick and turn" is out and today the emphasis is on esoteric terms like social audit, environmental audit, energy audit, value for money audit etc. How is this auditor, who is usually labelled as a traditional, conservative, rule bound, wrapped in procedures, looking for quantitative criteria and having an antiquated system of reporting, going to adjust, are issues which need a thorough discussion. Today, the entire audit profession is on trial. This watchdog has no other alternative but to change. For this, all of us, i.e. academicians, administrators and auditing bodies would have to play a proactive role on a priority basis.
For centuries, auditing has been concerned with the accurate and honest accounting of money, and property, belonging to either state, landowners, merchants, manufacturers or individuals, engaged in any form of commercial undertaking. The purpose here was to find out as to whether the managers or agents, carried out their duties honestly and also to see whether the legal and the specific requirements were met.
As time passed and the business became more organised, the role of the state also expanded and the concept of accountability was introduced. Propriety and regularity were added to honesty and accuracy. Lately, this has also changed and specialised applications like performance auditing and management auditing have developed. In the former, the emphasis is holistic and in the latter, the scope of accountability was expanded to include issues, which were beyond the traditional management of resources.
Growth has been there in all the other professions also. But in audit it has been different. Unlike others, the practice of auditing developed without the prior formulation of audit theory. Auditing became a practical subject. The motto was "auditing is what auditors do".
The way audit has been defined is also interesting as illustrated below :
"Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results to interested users".
- The American Accounting Association - 1973
"The objective of an audit of financial statements prepared within a framework of recognised accounting policies, is to enable an auditor to express an opinion on such financial statements. The auditor’s opinion helps establish the credibility of the financial statements".
International Federation of Accountants (IFAC) – 1980
The objective of the ordinary examination of financial statements by the independent auditor is the expression of an opinion on the fairness with which they present financial position, results of operation, and changes in financial position in conformity with generally accepted accounting principles".
-Statement on Auditing Standards of the
American Institute of Certified Public Accounts.
"Audit is the independent examination of, and expression of an opinion on, the financial statements of an enterprise by an appointed auditor in pursuance of that appointment and in compliance with any relevant statutory obligation."
-Foreword of the United Kingdom’s
Professional Auditing Standards and Guidelines.
The list goes on and on. The focus in all these statements is on the practical aspect and only specific situations are discussed. The emphasis is on putting the stamp of credibility on some financial statements. The bottom line is to look at some missing voucher or a wrongly entered data from a supporting document. The social function of audit or what value is his work to the society, has never been spelt.
As per Mautz (1975) :
Society either accepts or rejects the role that a professional group assumes for itself, in time the group either finds a role acceptable to society or the group disappears. As conditions and apparent needs change, society may reject roles formerly considered acceptable as professional groups must continually be alert to the desirability of role modification and revision.
This is the first thing that the audit profession would have to do. The rising expectations of the society would have to be kept in mind. The public would have to be educated as to what should they expect from the auditor. The concept like social audit, value for money audit, programme audit or management audit are fine, but what can society expect out of it is the moot question. Common man may argue as to why are we calling all this as audit, and not something like an inspection or examination or supervision. Every time there is a scandal or embezzlement one hears like :Hang the auditor!" or "Auditors have again let us down".
According to Flint (1988)
Audit is a social control mechanism for securing accountability. The onus is auditors and audit policy–makers constantly to seek to find out what is the social need and expectation for independent audit and to endeavour to fulfil that need within the limits of practical and economic constraints, remembering at all times that the function is a dynamic, and not a static one.
For this the auditing bodies would have to develop standards keeping in view the requirements and expectations of the society from the auditors. The boundaries would have to be defined between auditing, monitoring and investigating. The framework within which the auditor reports and the inherent limitations in it, should be matched with the rising expectations of the public and media.
3. Accountability Standards
Accountability as a concept involves two or more than two parties, between whom the role is defined and the expectations or achievements expected, clearly laid down. The components of this accountability are regularity, propriety and honesty, Economy, efficiency and effectiveness – the audit also called in UK as 3E audit, is also included within the period of accountability.
A moral dilemma faced by the practicing auditors is to where to draw the line of honesty? Should the agent’s fee be examined with a toothcomb or should supporting vouchers be asked for some huge miscellaneous payment. This becomes more complex when it is know that, but for this payment, the contract would have been lost or the fact that competitors were also playing the same game. You are quietly informed in a hush voice that company was left with no option but to adopt this "strategic" method. There are many examples when for getting the international contract, the first and the last question was :How much?" Should the auditor comment on this?
3.2 Objective Criteria
This problem of "black or white" becomes hazier when things like waste, mismanagement, economy or effectiveness are measured. The area of financial auditing is simple as the rules are known and quantifiable criteria can be developed. The problem becomes acute when performance auditing or the value for money auditing (VFM) or the 3E audits are being done.
In the audit of the social sector programmes, it is very difficult to lay down the objective criteria for the sub systems. For those who have worked as auditor in these sectors know, as to how easy is it to develop measurable objective criteria at the macro levels but the whole process becomes very complicated when this macro is broker into smaller parts. Here the conflict starts. The management feels that the auditor is not objective and the auditor feels that the criteria are not quantifiable and hence there is a room for audit observation.
Flint (1988) observes :
There is a particular difficulty in specifying criteria or, for example economy, efficiency, effectiveness or profitability. Other measures of accountability may produce even greater problems. Every organisation has a number of conflicting goals or objectives, competing demands or resources, and long and short time scales for measuring success or achievements.
The same can be true for mismanagement. Sometimes for a manager, the results are more important than the procedures. Also the end product is more important than the rules. A timely order has to be delivered or there is an emergency. The manager takes short cuts because he has to perform and deliver the goods at the right time. It is often remarked in a lighter vein that "no manager has got raise by keeping auditor’s happy!"
The auditor has the hindsight wisdom which at that time may not have been there to the management. But in many cases, it has been seen that at various levels, managers were not having a uniform perception about the measurable criteria. For this, interaction between the auditors and managers should increase at all levels.
This is another area in which the role of the auditor is changing. No longer is the auditor confined to some remote corner, on the top most floor of the administrative building. Today, for him to be effective he has to be also there on the shop floor, interacting shoulder to shoulder, with the cutting edge of the management.
Let us briefly see as to what are the various types of audit floating around in the international arena and what does each has to offer.
The most common definition of this is given by the US General Accounting Office (GAO) that "to provide reasonable assurance about whether the financial statements of an audited entity present fairly the financial position, results of operations, and cash flow in conformity with generally accepted accounting principles".
This is directed to measure the achievements of an organisation towards its goals and objectives.
This requires scrutiny of managerial objectives, plans and strategies and the effectiveness of management in performance of its responsibilities.
It is an objective and systematic examination of evidence for the purpose of providing an independent assessment of the performance of an organisation, program, activity or function in order to improve decision making by parties with responsibility to initiate corrective actions.
As per the Government Accounting Standards (1994) issued by the GAO this is to
identify factors inhibiting satisfactory performance;
This includes determining
A closer examination of the above would indicate that except for the financial audit others are more or less similar. These jargons have put lot of pressure on the auditor. Incidentally, inspite of hearing cliches like performance auditing, VFM audit and 3E audit, the auditors to clearly distinguish between them have not done much. Except for the country in which they have been developed i.e. USA, Canada and UK respectively, not much has been done to clearly define the basis by which, one is different from the other.
While addressing the XVI Conference of Commonwealth Auditors General, in November 1996, held at Lahore, Pakistan, Mr. Kenneth M. Dye, Former Auditor General of Canada observed :
What then is auditing? Well most of us in this room come from traditions which saw compliance with laws and regulations evolve into professional opinions on the fairness of account presentations. And now we see much of our public sector audit world beginning to focus on what the NAO (National Audit Office, UK) and OAG (Office of the Auditor General), Canada call value for money auditing and much of the INTOSAI community refer to as Performance Auditing. Same thing. When we combine compliance, financial attest and VFM or performance auditing into one basket, we Canadian call that Comprehensive Auditing. As you know in Canada we are bilingual nation and in the French language the complete range of public sector auditing is called verification integree, which roughly translates back to English language as integrated auditing. Well integrated or comprehensive it doesn’t really matter, but the combined basket of auditing services is what I mean when I say auditing"
4. Information Technology
The average life span of information technology, according to conservative estimates, is two years. Audit around the computer in most of the places has been replaced by audit through the computers.The technology is changing so rapidly that even the Electronic
Data Processing (EDP) experts are sometimes ignorant of the latest trends. Within
EDP alone we have distinctions like System Manager, Software and Hardware Experts,
Data Base Administrators and Programmers. The poor auditor for doing a good job, has to himself learn, understand and comprehend this knowledge. He has not only to update his basic auditing skills but has also to keep in touch with these changes of national and international levels.
Mautz and Sharaf (1961) observed
The prudent practitioner will keep abreast of developments in his area of competence; he will seek knowledge of methods of perpetrating, concealing and detecting irregularities……. He must take steps as are necessary to familiarise himself with developments in auditing. No reasonable man would expect to maintain his competence in a dynamic and growing profession without continuing study and effort.
5. Legal Complexities
The expectations of the public and other user groups from the auditors have increased manifold. They feel that here is a body which would give them a true, fair objective and timely information regarding the health of an entity. These interested groups feel bad when the auditors are not able to live upto their expectations.
Some of these groups or individuals even go beyond that. They use the auditors. This is another area where the auditor has to tread very carefully and which is changing the way the auditor’s give their opinion nowadays.
Let us examine some of the existing judgements on this subject from developed countries. Regarding the proof of compliance to the generally accepted standards, it was observed in the Pacific Acceptance case, USA, that
The propriety of taking a particular audit step depends on the circumstances met in the particular audit……When the conduct of an auditor is in question in legal proceedings it is not the province of the audit profession itself to determine what is the legal duty of auditors or to determine what is the legal duty of auditors to determine what reasonable skill and care require to be done is relevant to the question of whether there had been breach of duty. It follows, if the audit profession or most of them fail to adopt some step, which despite their practice was reasonably required of them, such failure does not cease to be a breach of duty because all or most of them did the same.
The Courts are looking in details at the method, procedure and practices followed by the auditors. The auditor of today has not only to be objective and competent but should also appear to be so. A failure to do so is taken by the law as negligence and aggrieved parties can hold auditors responsible.
It was also observed by the Supreme Court of New South Wales in 1970 (Pacific Acceptance Corporation Ltd. V. Forsyth and Ors.)thatIt is beyond question that when an auditor, professing as he does to possess the requisite professional skills, enters into a contract to perform certain tasks as auditor, he promises to perform such tasks using that degree of skill and care as is reasonable in the circumstances as they then exist.
The fear of legal implications has also brought about a change in the role of the auditor. No longer can he sit back or take his job casually because the repercussions of negligence are immense.
The role of auditor has changed dramatically and today he has moved away from the traditional job of finding honesty and measuring accuracy. The latest concept of auditing mainly the operational and management auditing have kept him on his toes and he has to constantly care for the expectations of the society and other users group. He has to be expert not only in auditing but should be well versed in other subjects like management, information technology, statistics and organisational behaviour.
More research is needed in the area of auditing and if this profession has to grow, more emphasis has to be laid on research. Also there has to be uniformity at the international levels so that different yardsticks and processes are streamlined and properly understood by all concerned.
The explosion of knowledge, development of technology, complex public and corporation policies, complexities of national and international transactions, the knowledge and understanding of local laws and the increasing emphasis on speed and time in business has thrown a challenge at the auditor of today. His role is now not static but is dynamic.
-by Pritam Phookun
Assessment of achievement of the objectives
"The novice teacher shows & tell incessantly;
The wise teacher listens, prods, challenges
And refuses to give away the right answer.
Ideally, students remember what they have learned
Not what the teacher told them."
As trainers, you are aware that the learning process is as important as the content of learning. This perhaps is more so in an adult training environment. Often, unskilled trainers put overwhelming importance on the content/topics of the training programme and ignore the learning process, thereby hindering the creation of an appropriate learning environment. As a result, not only do the trainees go away dissatisfied, but the learning also remains largely ineffective.
The art of instruction that strikes a balance between learning content and learning process is also referred to as the art of facilitation. "To facilitate" means "to make easy". The effective adult instructor has to be an effective facilitator. In other words, he/she has to be able to make the learning process easy; "easy" not in the sense of being simplistic, but rather in sense of getting the trainees actively involved in the learning process. Training is value added only if the entire group of learners (including the instructor) form an inter-active learning community wherein everyone shares responsibility in the learning process. The trainees should feel that they own the training and not that the training is imposed on them by the instructor. The trainees should feel that they can, and have, contributed significantly to the learning process and not simply absorbed passively what the instructor has to offer. The learning process should challenge the trainees to think and explore. The learning process should boost the confidence of the learners. In short, the learning process should be geared to help the learners "learn to learn" rather than to spoon feed them and, thereby, leave them dependant on the instructor. By the end of a course, the learners should feel confident that, not only have they learned important things during the course, but also that they have the ability to learn on their own and to contribute meaningfully to any learning process. If this happens, then the effects of learning will spread far beyond the confines of the classroom. There are numerous benefits to such an adult learning process. These include :
It is the primary responsibility of the instructor/facilitator to create and maintain the learning process described above. The facilitator of adult training would be well advised to be aware of the conditions that facilitate adult learning and ways to create these conditions.
Seven Conditions Facilitating Adult Learning
Listed below are seven conditions which facilitate adult learning followed by some suggestions for building and maintaining a positive learning environment.
1. Participation Of Adult Learners
They learn better when :
2. Definition Of Their Personal Objectives
They commit themselves more to a learning project when :
3. Tolerating Divergent Options And A Diversity Of Ideas
They learn better :
4. The Right To Make Mistakes
They learn more easily if :
5. Welcome Openness
They learn better if :
6. Self-Esteem And Respect
Adult learners learn better if :
7. Acceptance Of Individuality
They will feel free to choose to learn if :
Skills Of An Expert Facilitator
Amongst the various skills that an expert facilitator possesses, two are highlighted here, viz (i) the art of listening, and (ii) the art of questioning.
The Art Of Listening
It is vital that the adult trainees feel understood and accepted for what they are. Effective listening is a sine qua non to understanding the trainees. One of the main reasons for ineffective communication is poor listening. Good listening helps in many ways. It
This relates to the factual side of the message. This technique is executed by stating back to the speaker what you understand of the speaker’s message. This way the other person will have an opportunity to correct your understanding, if necessary. It will also indicate to the other that you have taken the effort to carefully listen to what he/she had to say.
Techniques For Effective Listening
This involves verbalising the speaker’s feelings which may or may
not be communicated explicitly. Recognising and helping to express feelings freely is a
vital part of the adult learning process and, therefore, an important responsibility of the facilitator.
This involves behaviours such as making eye contact with the speaker, leaning slightly towards the speaker, maintaining an open posture, etc.
Use appropriate body language
The Art Of Questioning
"What is more important is asking the right question, rather than giving the right answer"
Adult training is not so much about obtaining the right answer as much as to stimulate the trainees to think and explore. In fact, very often there are no clear right and wrong answers in the world of adult experiences. By using appropriate questions, the expert facilitator is able to draw out the adult trainees, encourage them to test their understanding, challenge them to think creatively, provoke them to question set attitudes, help them to interact with fellow members of the learning community. By effective questioning the facilitator can also gain a better understanding of his trainees’ knowledge, skills, experiences and feelings. Thus, appropriate questioning can help both the trainees and the facilitator.
Characteristics Of Good Questions
Good questions in a learning environment are :
Types Of Questions
There are four types of questions :
Question that does not invite any specific answer but opens up a discussion. E.g. : "What are your views on the Kargil conflict? Such questions are useful for initiating & generating discussion.
Open question :
Question that invites a specific answer like "yes" or "no" or brief appropriate details. e.g. : "Do you play cricket?" or "What is your name?" They are useful for controlling discussion & obtaining specific information.
Closed question :
Question asked to the whole group, not directed at any specific member. They are less threatening than direct questions and useful for starting discussion.
Overhead question :
Directed at a specific individual. Best used after participants have settled down. More threatening and, therefore, to be used cautiously. Useful for controlling distractive behaviours (like side discussions between a few members when a group discussion is in progress).
Direction question :
The role of an adult facilitator is a challenging one. Very few are perhaps born to be good facilitators. More often than not good facilitation is the result of learning the appropriate skills, dedication and practice. A good facilitator will not only find, his role most satisfying, he can also contribute very meaningfully to the growth and development of the adults whose learning he facilitates.
[Presentation made by Shri K. Subramanian, Advisor (IT) in the Seminar on IT-Audit held in China in Nov"99 ]
India has taken various measures of reforms in governance: in development of Government information system, implementation of functional computerisation of various tax administration, tax assessment and tax management systems, geographical Information bases comprising of land use, land management and land administration, decision support systems for financial and personnel management, integrated social and welfare information including information based on census and health. All the States and Union Terriroty Governments of the Union of India are automating and creating information bases for day to day administration, management of plan/schemes and programs. The corporate sector has also launched automation, ERP and other information development programes because of global competition to produce quality goods and services at an affordable cost for domestic consumption and also export products and services. The Government has recognised "information" as an "asset" and adopted various appropriate technologies for information gathering, storing, disseminating and using the functional information for day to day management and operations, with scarce Government resources being invested for technology development and use of technology in management of Governmental operations in the administration, manufacturing and services sectors. For the corporate world, the SAI of India has decided to equip to audit the IT products and systems apart from conducting financial and operational audits.
The audit evolution which was conceptualised as auditing of data centres earlier in the 60s and 70s, has grown to the auditing through and using computers in the 80s and early 90s and has evolved into the Information Technology Audit (IT-Audit) in the post 95-era, comprising of systems audit, technology audit, operations audit, financial audit, business impact and impact on organisational structure. The hardware and software industry has been growing at a very fast pace and shortened the life cycle of systems and products to three years. With the new millennium fast approaching, the technology life cycle of these products and services is being compressed to 12 to 18 months and the Government which was investing lot of resources in the development of IT for its operations and management purposes has faced a challenge of technology stablisation and fast obscelence in the IT hardware and software scenario. The communication technology is also growing at a very fast pace in India which has compressed time and space to introduce tele-computing, tele-education, tele-commuting, tele-medicine and tele-conferencing.
With the fast growing "Internet" and setting up of "Intranets" within and outside organisations, comprising of various sectors of economy, the Government auditors have been faced with new challenges in auditing of computerised environment, systems and technologies, investment made thereon, and cost-benefit achieved. With quality consciousness growing in the manufacturing and services sector, audit function is also not an exception. The "quality management" and the "quality system certification" programme also form part of "quality audit". The audit of these technologies in systems assumes greater significance in a developing country like India and creates a new kind of ethics and standards to be practiced by organisations and professionals for delivering their functions efficiently and effectively. The assessment of efficiency and certification of quality are the two eyes of IT audit which enables the utilisation of newly emerging, powerful information technologies for effecting faster development and also improve competitiveness of the developing countries along with developed nations. Tuning with the implementation of reforms in India in economic, industrial trade and finance, the SAI India conceptualised a new framework for IT-Audit with appropriate tools and techniques for conducting the audit.
Workflow Automation & Less Paper Scenario
The workflow automation of routine functions of the Government leading towards "paperless" or "less paper" environment introduced a new challenge in the implementation of the controls, audit trails and authorisation of financial and other implications in the generation of records, files, movement of files, documentation of files, storing of files and retrieving of files, has wider impact on the conduct of audit. This complicates evidence collection, organising and analysing the gaps and produce reports bringing out the defficiencies in the systems and procedures having financial bearing, efficiency bearing, economic bearing, and bearing on utilisation of scarce resources for better management of Governmental programmes and functions. The new electronic technologies also introduce a challenge of gathering evidences, collection of evidences, and persuation of auditing institutions to accept the evidence and produce useful reports based on the analytical and presentation capabilities of the auditors using available appropriate technology and tools, either built within the system or using specialised software.
Migration To Generic Software Tools
Though there are few software packages earlier available like IDEAS, ACL etc., the development of software, operating system and data base technologies have introduced availability of new tools and facilities and features in the operating systems, databases, and system management for programmes/utilities to enable auditors to retrieve the facts about the authorisation, access and utilisation of resources within and outside the system. Thus development of new generic software tools introduces a new challenge and appropriate service capabilities upgradation. Retraining auditors who have not been exposed to technologies, have to use new technologies for their day to day operations. This involves appropriate training and managment plan to be devised by any audit institution who has got the responsibility of auditing the Government systems all over the country.
Direct Financing And Gaps In Classification/Interfaces
The creation of new bodies like Panchayati Raj institution, the district rural development agencies and local area development programmes of the Members of Parliament and Members elected to the Legislative Assemblies in the States and decisions made by the Union of India of directly financing the States, outside the State financial system weakens financial and audit control and at present create difficulties for SAI audit to integrate the Central financial release with the State implementation progress and the financial implications thereof. The integration of such schemes audit between the Centre and State systems is a complex task in the absence of integration and good interfaces between the centre and State financial systems. The issue of auditing these kind of centrally sponsored programmes with or without local participation of funds from the State Government has thrown a greater challenge to the auditors’ integrating State system with the Central Government systems. The new issues which are arising out of this kind of funding programmes between the Centre and the States are listed below.
1) There are gaps in classification of information and systems which are used for monitoring the implementation of these plans and programmes.
2) The interface assumes greater significance between the approved plan-budget and budget and accounts.
3) The economic classification, industrial classification of products and the classification used in the taxation programmes differ from classification in accounts-plan-and-budget, thus proving an essentiality of unification of classification schemes between plan-budget-accounts and that for trade-industry-economy-commerce and taxation.
Security, Control and Audit Implementation
The concern of information security assumes greater significance where the Government will become vulnerable, failure to the information systems without which they cannot function if the IT is introduced fully in the organisations. The consequences of the damage to the information infrastructure of department/organisation/region can be far reaching whether the damage makes resources unavailable or impairs integrity of the information or breaches its confidentiality. The information security is a management discipline that assesses the vulnerability affecting the availability of integrated and confidentiality of the information from organisation and design and implement and monitor a wide variety of control measures to reduce vulnerability.
The information security is concerned with the information available in the manual form and differences between information originally produced by human and that is electronically manipulated. The electronic messages and transaction creates deeper significance of the information security which is needed for protection of paper based documents. The networking of computers between intra and inter offices has produced a greater challenge to the auditors to find out manipulation and misuse of information assets which are used with the motivation of fraud, malicious attack of the functioning of the agency within and outside the Government.
The primary objective of the IT audit is to determine whether the computerised information systems safeguard assets, maintain information integrity, achieve organisational goals effectively and efficiently and improve utilisation of scarce resources effectively to produce goods and services at an appropriate cost. The proper implementation of internal control system plays a major role in ensuring these objectives. Inadequate development of internal audit mechanisms thrusts the external auditors like SAI, a larger responsibility, to ascertain the controls and properly monitor the safeguard against illegal access and abuse (the assets defined are hardware, software, data/information documentation, personnel etc.).
The participation of auditors in the systesm devleopment life cycle is a major inhabition to overcome though various constitutional provisions enable auditors to be involved in the process of system development life cycle. This has been deliberated and a conclusive decision has been made that the responsibility of SAIs is to specify the minimum and mandatory controls and audit trails required in the systems and processes, so that auditors at a later stage can use these trails for post auditing systems and technologies.
The new technologies/environments have not changed the fundamental nature of the audit but it has caused substantial changes in the methods of evidence collection and reporting.
IT Revolution And New Audit Challenges
The current information technology trends are described as follows:
IT-Audit, The Need, Justification And The Impact
The impact on auditing due to information technology trends is as follows:
The major impact of information technology is felt on internal auditing. The Systems Auditability and Control (SAC), study of Institute of Internal Audit, USA reveals that internal audit staff nearly spend 46% of time on compliance audit, 24% on operational audit, 16% on EDP audit and 14% time on their involvement in Systems Development Life Cycle (SDLC). This necessitates to bring awareness to managers and auditors in order to adapt themselves to the changed scenario and acquiring necessary additional skills for conducting audit in these new environments. The successful computerisation projects if analysed reveal active cooperation and the participation of the top management. Each of the management functions has to be evaluated by the auditors to assess the overall involvement of management in the total computerisation process.
The major planning functions are indicated below as an essential tool for successful implementation of major computerisation programmes in Government/corporate /industry sectors. The feasibility study to preceed the computerisation programme to indicate the cost and benefits of usage of information technology and computers in the long range plan. The selection of suitable and appropriate computer systems for satisfying the need for application specification requirements is essential. A planned installation and a careful physical planning is equally essential. The reorganisation of the organisation structure and functions for effective computer usage is needed. There is a long range strategy plan and annual business plan to be worked out for every organisation. Close monitoring of the plan must be executed. A comprehensive disaster recovery and contingency plan must be prepared to cope up with the unforeseen disaster (natural or human made).
Information systems are becoming an important part of the organisations and work as nerve centres without which organisations will not be in a position to work/function. It, therefore, becomes necessary for every organisation to create a corporate information security group and a Information Security Administrator. The Information Security Administrator will also look after the communication security aspect if the organisation has got network connecting multiple office locations. The organisation also must classify information into various groups depending upon the various degree of security level for protecting information from illegal access and abuse. The organisations' personnel policy must reflect security consciousness and suitable action to be taken on voilators of security regulations at all levels. The physical security measure is an important criteria which takes care of the computer system evolution and prescribes access, entry restriction, as well as, environmental controls. Cryptography to be used for encryption of information classified above certain defined security levels. In the area of systems security, the user codes and passwords at all application levels, and access controls must be established. The important data files must be protected and varying degree of access controls are to be provided. Apart from data security features, the organisation must implement the organisational security functional layers as an interface to the databases so that 'need to know'menus' for display, as well as, the location based access controls. A detailed procedure has to be laid out to see that backups are taken on a periodical basis as desired by the management and a suitable contingency plan worked out to be followed in case of disasters. It is essential to segregate duties of various officials and a detailed logs to be maintained.
Information Systems Auditing Standards
In the Indian context, the number of professionals, qualified for information systems audit is increasing and it is predicted that information systems administrators and auditors will emerge as a new class of professionals and the lot of progressive efforts are made in the establishment of need of this kind of professionals to emerge for future auditing of information technology based systems and services. 10 standards which have been evolved by the ISACA, USA have also been adapted by ICAI and with the rapid advancement of technology, it is necessary for the professionals who audit the information technology and information technology based services to qualify themselves to audit new technologies based environments. It is highly essential that passing an examination and having a practising licence does not entitle to practice for ever as they have to requalify themselves at determined frequent intervals to qualify for audit in this new changed environment based on the rapidly changing technologies. These new technologies pose new challenges in the developing countries and the necessary legislative support are to be given to sustain these technologies for operations and delivery of new services. The impact of the technology has changed the organisational structure and the way in which they operate and the means through which they deliver their products and services.
ISACA AICPA IIA ICAI Audit Objectives
B. Technical Competence
C. Performance of Work
ISACA - "Information Systems Audit & Control Association, USA."
AICPA - "American Institute of Certified Public Accountants, USA."
IIA - "Institute of Internal Auditors, USA."
ICAI - "Institute of Chartered Accountants, India."
COBIT - Control Objectives For Information And Related Technology
The Information Systems Audit Control Foundation (ISACF), USA has evolved generally applicable and acceptable international standards for good practice of information technology control. The generally acceptable worldwide standards & regulations are
COBIT Implementation And Use
|1) Audit Reports:||COBIT is appearing as criteria in audit reports & included in audit manuals.|
|2) Audit Procedures :||When auditing IT, it is used as audit procedures by auditors.|
|1) Top management:||CEOs use it as a reference source when IT issues arise & requiring it to be included in the request for proposals for IT audit, evaluations and reviews.|
|2) CIOs:||COBIT concepts are incorprated by CIOs in their policies & procedures for managing IT resources.|
|1) Training:||COBIT is incorporated as training modules in Government Auditors training.|
|1) Industry Forums:||Industry forums such as information systems security, control and audit professionals use these concepts.|
Legislation Supporting Security & Audit
The impact of this new technology necessitates support the legislation of new acts or amendment of existing acts. The need-based legislation is an important issue to be discussed, debated and that calls for reclassification of information to be made available to the eligible
class of people and legally punish the others who illegally access and abuse the information for their own benefits.
In the Indian scenario, the present legislation governing the following acts need amendments or to be replaced by new acts.
|1)||Evidence Act||Does not have the provision for acceptance of computer produced documents/micro-film as an acceptable evidence in Indian courts.|
|2)||Indian Customs Act||The computer produced micro-films of the shipping bills made by customs authorities are acceptable only in Custom Tribunals as a proof of evidence. Other courts do not accept.|
|3)||Bankers Book of Evidence Act||Provides provision only for ledgers kept in the banks are acceptable as evidence in Indian Courts.|
|4)||Negotiable Instruments Act||Does not provide a provision for copies which are made during Reserve Bank of India clearing house operations as a proof of fund transfer between two accounts. The bankers are not sending the checks to the customers and it is the responsibility of the banks to keep them for 10 years. In other countries, the checks are sent to customers and it is customer’s responsibility to find out any fraud committed on the cheques.|
|5)||Archival Act||Provides guidelines and mechanisms for preserving information contained in Print/Paper media only and does not cover information stored in Electronic media.|
|6)||Copyrights Act||Though modified at present, does not fully cover the requests for software etc.|
|7)||Patents Act||Needs certain modifications to cover latest technological patents covering Intellectual Property Rights. Does not fully cover the differences between processes and products, patents.|
|8)||Indian Penal Code||At present covers clauses which are broad banded. Does not cover the electronic crimes and frauds, modus-operandi of the crimes, and identify the persons committing the crimes.|
|9)||MRTP Act||To control monopolies and restrictive trade practices.|
|10)||Consumer Protection Act||Prerservation and protection of consumer rights.|
|11)||Contracts Act||Legal provisions for business contracts.|
|12)||Arbitration Act||To supply business disputes, especially arising of global contracts|
The following new acts are planned to be introduced:
|1)||Information Protection Act||Enables to store information and give a safeguard for this information should be used only for the purpose for which collected and should not be misused for other purposes.|
|2)||Electronic Archival Act||Guidelines for prerservation of information stored and retrieve it as and when needed as stored and keeping a log of modifications/changes authorised and carried out in electronic media.|
|3)||Illegal Access and Abuse Act||Provide safeguards for unauthorised access and identify accessor who have been authorised by means of different access technologies and control mechanisms.|
|4)||Privacy and Piracy Protection Act||To enable privacy protection for common citizens and safeguard them against the illegal access and misuse.|
|5)||Electronic Commerce Act/Information Technology Act||This enables legal provision for electronic trading and EDI for international and domestic trade.|
|6)||IPRs||To modify to suit WTO/GATT agreement signed by Government of India.|
CISA’s Or CPA’s -The New HR Requirement For Auditing Programs
Another challenge faced for implementation of information technology in developing countries is to create suitable human resources for management of the same. There is a need for quality certification and also define rules and regulations for ethics and standards for practioners of this technology. The new class of IT auditors are in demand and country has to initiate suitable action for creation/promotion and growth of these specialists to give support for new technologies implementation. The information systems certification agencies are coming up and there are special courses conducted by various research institutions/universities to not only create awareness but also to educate management at all levels to be knowledgeable about information systems vulnerabilities and provide adequate safeguards in their own operations and control. The certified public accountants (CPAs) are also providing the resource personnel for auditing information systems in organisations, but their knowledge of technology is limited. The information technologists on the other hand does not have the knowledge of audit and there is a strong need for inter-disciplinary functions to be integrated and new resources personnel are produced for managing the information systems and technology audit challenges. In our opinion, the information technology audit consists not only financial audit but also Systems, Technology and Operations Audit. The enactment of new standards like ISO-9000 enables certification of the systems and processes to certify quality. The certification professional and the agency who certify, are supposed to continuously update their technologies and tools to audit these certified agencies and institutions so that the quality is maintained and total quality management is agreed to be a part of management commitment in every organisation. The information technology industry is posing a new challenge for this quality assessors and auditors as this is the only technology which is growing at a very fast rate integrating the electronics, the entertainment and business functions and provides a tool for human being to upgrade their standard of living by means of adapting these technologies. Information technology audit is a new profession which is inter-disciplinary in nature which has been debated all over the world to decide whether computer and communication professionals will be the certified IT auditors or the conventional audit functionaries are to be the certified information systems auditors. It is too early to decide as one lacks expertise on the technologies and other lacks expertise on audit. The Information Security Administration requires a new class of professionals for which standards are being worked out by various professional bodies so that this new class of professionals will be in a position to advice, conduct and certify that systems and technologies in use for day to day decision making purposes and is certified for foolproof and adequate safeguards introduction for prevention of malpractices and misuse.
The International Association of Supreme Audit Institutions Committee under the chairmanship of the Comptroller and Auditor General of India to device methodologies, systems and guidelines for conducting audit in EDP environments is finalising guidelines. Work is under progress.
tools, creating an IT-infrastructure in audit offices and forming localise IT-Audit groups for conducting IT-Audit along with functional knowledge experts. The IT Audit plan will be implemented in the next 2-3 years, clearly indicating the importance of IT Audit and need for transformation of Government Auditors to meet the new challenges in the 21st century.
4. Resposibility For Privatisation