Public Audit in India - Is and Ought

October 2003--June 2004

Public Audit in India - Is and Ought
Paper prepared by S/Shri Ashwini Attri, M. Naveen Kumar, Mukesh P Singh, Pawan Negi, Ms. Ratna Vishwanathan and S.A .Bathew -IAAS officers)

1. Introduction

1.1 Audit Definition

The Oxford Dictionary meaning of Audit is to make an official examination of accounts to ascertain their accuracy.However, the expression‘Audit’ has not been defined anywhere in the Constitution of India or in the Comptroller and Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971. In UK the National Audit Act, 1983 expressly authorises and empowers the CAG to carry out examination into economy, efficiency and effectiveness with which a department, authority or body has used its resources while discharging its functions.Likewise, the Auditor General of Canada has been specifically authorised to report on cases in which money stands expended without due regard to economy, efficiency or where satisfactory procedures have not been established to measure and report the effectiveness of the programmes.

The absence of definition of the expression Audit has left the scope of audit open ended which has enabled the State Audit of India to respond to changes in the pattern of Government activities and expenditure, to keep pace with the developments in the profession of Audit and also to try to match the expectations of the stakeholders.In effect the continuing enlargement of the scope of the State Audit in India, over the last 50 years or so, has been untrammeled as it has not been constrained by a restrictive four-walled definition.

With the advent of Auditing Standards in 1994, the expression Audit has been explained as to what it would constitute.It categorically proclaims that it includes both financial as well as performance audit.

1.2 Audit :History

India is an ancient country and had empires and city states even before the birth of Christ. One of the well known works pertaining to this era is“Artha Shasthra” which is a treatise on how to run a government. In medieval times, the Mughals had an elaborate system of accounting and auditing right from the village level upto the government level.The East India Company which was the forerunner of the British government in India felt the need for proper accounting system and auditing when their business expanded in India.It can be said that modern methods of audit and accounting came first to India with the setting up of the Audit and Accounts department by the British in 1858 in India. From the point of view of the world also, State Audit was an ancient profession.Some of its antecedents can be traced back to the administration of the Greek city states, the early Chinese Bureaucratic empires and the kingdoms described in the Hebrew Bible.

State Audit can be divided historically into 3 parts: from ancient until the French Revolution: from the French Revolution until the aftermath ofWorldWar II and the period since then. Until the French Revolution, audit was an internal process, the Auditor was subservient to the King or ruler and functioned mostly as an accountant of income and expenditure. After the French Revolution, a new concept was introduced, that of state audit as part of the public accountability process.The new idea stated that State Audit’s function was to report to the public, not only to the King or ruler, on the deeds or misdeeds relating to the public purse.In order to enable the auditor and his staff to do so, they were ensured independence of office and tenure.By the end of World War II, the institutions of state audit were well established as independent branches of public administration, serving the public, providing for full accountability of the government. After World War II, its emphasis shifted from regularity and financial audit, to what state administrations do, not how they account for it in financial terms.The emphasis of the 3Es - economy, efficiency and effectiveness changed the whole conception of state audit’s role in public administration.

1.3 What is Audit?

Audit is to ensure public accountability which is:

  • (a) the obligation of persons/authorities/bodies entrusted with public power and /or resources to report on the management of such resources and to be answerable for the fiscal, managerial and programme responsibilities that are conferred.
  • (b) the answerability of the Executive to the Legislature and through the legislators to the people, civil society and other stake holders.

1.4 Why Audit?

All societies are interested in good governance and good governance is a product of public interest and public accountability.Maintaining the integrity of the nation, food security, maintenance of law and order, prolongation of life, eradication of illiteracy, technology advancement, regional development, social changes through legislation, maximum happiness for maximum number etc. constitute public interest.Public interest to bear fruition, therefore, obviously required financial resources.

Policy formulation may have political orientation but spending is a common denominator and the accounting of such spending goes hand in hand with public accountability which is thesine qua non for good governance.Audit is to ensure this public interest and public accountability.

2.Mandate

The Constitution of India (Articles 148 to 151) mandated the Comptroller and Auditor General of India with considerable authority, dignity and independence.He is to ensure the accountability of administration to Legislature both at the Centre and at the State.He is neither an officer of Parliament, nor a functionary of the Government.His gaze is long and deep.

“I am of the opinion that this dignitary or officeris probably the most important officer of the Constitution of India.He is the one man who is going to see that expenses voted by Parliament are not exceeded, or varied from what has been laid down by Parliament in what is called the Appropriation Act.If this functionary is to carry out the duties - and his duties, I submit are far more important that the duties of the judiciary.” said Dr. B.R. Ambedkar.

3. Audit Effectiveness

3.1 Role of Audit

Traditionally the most important role of state audit, and the one that remains so even today, has been that of an agency to secure executive accountability to the legislature. How far audit has achieved the mandated role is examined in the succeeding paragraphs:

3.2 Accountability structure

Effective exercise of accountability depends on the quality of internal

control, information management, performance review, financial monitoring, internal audit etc.The accountability structure, as it obtains today, falls broadly

under two groups, namely, internal or administrative accountability and public accountability.

3.2.1. Internal accountability structure

Internal accountability provides support to the senior management to meet their obligation for public accountability by providing timely, reliable and relevant information on performance. Cabinet is the highest executive body and the minister is personally accountable to the legislature for implementation of the approved policy of the government.The secretariat is the support institution for the cabinet and these together represent the government.The secretariat comprises the government departments each headed by a Secretary.

The Secretary is responsible to the minister for the entire department, which may have more than one directorate.His focus is on programme accountabilityi.e. results of government operations.His main financial responsibility is operation of the budget grant and proper use of the financial resources for achieving the approved programmes of government.

3.2.2 Public accountability and public financial accountability

Obligations of public financial accountability are met when the government places the budget in the legislature and legislative debate and feedback from
people influence government policy and budgetary decisions.Similarly, tabling of audited accounts and CAG’s reports are crucial demonstration
of public accountability.These enable the legislators, media, people etc. to raise questions about performance of government.These also enable the
donor agencies and investors to form opinion about the financial health of the government.At another level, when the professional civil servants appear before the Public Accounts Committee in relation to audit reports to explain gaps in performance, obligations of public accountability are met.Examination of government activities by judiciary and regulatory bodies are other important components of public accountability.

3.3 Breakdown of the Administrative accountability structures, particularly in the States

3.3.1 Budget

CAG’s audit of budget is conducted in two stages - appropriation audit at the macro level and audit of budgetary process and controls in the departments at the micro level? At the macro level, the budgets are marked by large scale unspent funds and excess expenditure over the budget provisions, unnecessary supplementary provisions, failure in timely surrender of savings etc.

Some of the major deficiencies commonly commented in audit point to serious gaps in the process of internal accountability.

4 Budget estimates are mostly finalised with adhoc incremental addition over the previous year’s estimates without sufficient input from the estimating officers and in utter disregard of the actual expenditure.

4 Capacity of a department to implement the plan schemes is often not considered sufficiently.Consequently, the plan schemes are often not implemented due to short release of funds and failure to meet the approved requirements. Huge savings or unspent provisions are commonly reported observations in audit.

4 Staff cost constitutes the bulk of the non-plan budget.Audit scrutiny has repeatedly shown that most of the State governments neither have details of the sanctioned strength of staff nor men-in-position.Thus, the provisioning for staff cost becomes suspect and is, therefore, fraught with the risk of provisioning for unauthorized addition to the staff strengths and even ghost employees.The unspent balances, more often than not, are used for purposes other than appropriated for e.g., Ayurveda Scam in UP.

4 Budgeting for project expenditure also leaves much to be desired as the exercise is often undertaken and finalised without adequate inputs and without consideration for pending liabilities. Consequently, instances of providing funds for unsanctioned and unapproved schemes are galore. Progress of the project suffers as the funds for the current activities of the project are spent on discharging the past liabilities.

4 Bulk of budgetary excesses / savings are not explained by the controlling officers at the appropriation account stage and even by the Secretaries at the appropriation audit stage.Refusal to be accountable for the excess or savings facilitates waste, loss and misuse of public funds.

3.3.2 Expenditure Control

4 The controlling officers are to keep appropriation registers and DDOs are to send monthly statements of expenditure. Very often these statements are not sent and if and when sent these are not compiled with sufficient vigour to facilitate effective monitoring of the progress of expenditure.

4 The mandated reconciliation of the departmental accounts maintained by the Controlling Officers with those of the Accountant General are in huge arrears.

4 The subsidiary control registers and other records to be maintained by the DDOs and Controlling Officers are either not maintained or wherever maintained are far from satisfactory.

3.3.3 Programme Management

4 Reporting of programme performance and its linkages to expenditure report is often reduced to a ritual.Timely assessment of risks and internal evaluation of the schemes or projects is also seldom practised. Exercise of accountability, therefore, is adversely affected.Instances of large scale drawal of funds through Abstract Contingent bills without furnishing the detailed bills, sanction of temporary advances and not ensuring the adjustment or refund of unspent funds, diversion of scheme funds to PL Accounts and banks are common.These are examples of how the programme expenditure is manipulated.Active participation of the controlling officers in such subversions is well documented in audit reports.Lack of propriety goes hand in hand with absence of accountability.

4 Expenditure through grants-in-aid to various autonomous bodies and quasi-government institutions is an important component of programme expenditure.The grants are given on recurrent and non-recurrent basis.Audit of the expenditure of grants has brought out serious gap in accountability of the disbursing departments. Large amounts of grants are disbursed to the autonomous bodies and other institutions without adequate safeguard against their misuse.Controlling Officers rarely pursue monitoring of the utilization of grants earnestly.In many departments, even the total number of institutions receiving grants are not known.Complete information of the grantees could not be given to audit in any State though this is being pursued with them for years.The Controlling Officers do not obtain the utilisation certificates in a systematic manner.While releasing the recurring grants to institutions like schools, the Controlling Officers do not ensure the compliance of essential pre-conditions for the release of grants.It is not uncommon that nonexistent schools are sanctioned grants.

4 Several new institutions have been created in recent years to implement

central programmes with considerable financial involvement.These innovative institutions have created new problems of accountability.These institutions spend huge amount of public funds, but do not have adequate checks and balances. They have fewer rules, and significant financial powers for the middle and senior level management but poor financial management capability.Preparing accounts and getting them audited are often disregarded but the Government continues to provide funds for them. Accountability for failure and loss of public funds due to mismanagement is difficult to enforce due to unclear accountability structure.These problems are further complicated as legislators are often appointed as the Chairmen with executive powers in such institutions.They owe little accountability to any control exercised by government.

4 Lack of accountability at the senior level is accompanied by large-scale delegation of power to the middle and lower management without review and safeguard against misuse of authority.This has facilitated serious frauds.The Ayurveda scam in UP, Fodder scam in Bihar and LOC scandal in Assam are grim examples of such failure in accountability and governance.

4 Deficient internal control and weak internal accountability severely affect the public accountability process.For example, the Secretary can hardly explain the budgetary excess or other failures effectively if he has no effective control over the information flow.The controlling officer has little check over the estimates or quality of information from the DDOs.

In retrospect, the whole structure of internal accountability requires a fresh look and rebuilding especially against the backdrop of preordained blurred concept of accountability in India.The systems are so laid down that no individual can normally be held accountable for any decision.The layers of decision making agencies add to the dilution of responsibility at each stage in the name of collective responsibility. This facilitates inaction, delays and non-performance.

The apathy, the disregard and the propensity to skip over any scrutiny of any accountability process is brought out best when an audit team goes to audit a government office.

4 The records asked for by the team would seldom be handed over with any degree of alacrity.Records are held back and produced grudgingly that too when it is time for the Audit party to wind up the audit.

4 Replies to audit observations / queries are few and far between.

4 The time old desirable practice of having a discussion by the head of the office at the conclusion of audit with the audit team has been almost forgotten.

4 Inspection Reports are seldom replied to.Replies, if and when received, are evasive and obfuscatory.

4 Draft paras/ reviews sent to the Secretary of the Department by the A.G., through demi-official letters also evoke little response.The bizarre examples of an entire audit report not containing a reply of the Government to even a single audit para is common to several states.This happens despite the fact that nearly six to eight months time is available to the Government to reply before the reports go to print.

3.3.4 Public Accountability

Audit reports provide legislatures with performance reports of the executive to enforce accountability.Public Accounts Committees (PAC) examine the audit reports and make recommendations.They report to the legislatures about action taken by the executive on the recommendations. PAC also recommends the regularisation of the excess expenditure based on the appropriation audit report.On both counts, the system has lost efficacy in most of the states mainly due to lack of response from executive to audit observations.

4 There is huge pendency in discussion of audit reports. A whopping Rs.94,000 crore of excess expenditure was to be regularised in the states as of September 2000 mainly because explanations for such excesses were not forthcoming from the Government.

4 Due to failure of submission of explanatory memorandum by the departments and for other reasons, arrears in discussion of audit reports have reached staggering proportions.In several major states discussions are confined to paras of old reports on a piecemeal basis.Some of these audit paras are more than a decade old and have lost relevance.In some states, a series of audit reports were passed over entirely by the PAC due to huge backlog.

4 Delay in discussions of audit reports had an unwholesome impact on the entire process of accountability.R.K. Chandrasekharan observed: “Non pursuance of paras not selected for examination in a regular and effective manner virtually left them out in the cold, which, perhaps, unwittingly encouraged the administration to play the game of ‘wait and see’ until the natural demise of para.”

4 Management response to audit is poor.Lack of response is acute at the stages of audit inspections as well as at the legislative audit stage.

4 Quality of accountability suffers due to lack of synergy among the various components of public accountability.This triggers incompetence, corruption and unresponsiveness of the administration.Quality of accountability is closely linked to the quality of public service.The former is the driving force of the latter.If public accountability is not vibrant, administration gets the signal quickly and the public suffers due to poor, unanswerable and unresponsive administration.

The widening gaps in the public accountability process in the states are adversely affecting the quality of administration, as reflected in the audit reports.With virtually no immediate prospect of being asked to explain their performance by PAC, civil servants take things easy.There is thus little pressure to either perform or to explain failures in performance. There is thus an urgent need to revive the process of public accountability.

3.4 Audit: Aid to Administration

In the context of the role of audit as an aid to administration, a question sometimes asked is: Is it the role of audit to act as an aid to administration? The orthodox amongst the tribe may well say ‘no’ this is not the role of audit.That, in our view, would not be a correct perception of the role of audit.The fact is that a lot of output generated by higher audit namely the CAG’s Reports, is of immense benefit to the policy makers, the administration and many others.

The analysis on state finances and financial management, cases of wastage and inefficiency, cases involvingunder assessment of taxes, VFM studies on major socio-economic programmes, comments on annual accounts of companies and appraisals of Government companies which are contained in the audit reports, all carry important and significant message for the administration.Also, there is a wealth of data in the Audit Reports for the academicians and news items for the journalists.Finally, these reports are a vast source of information for the knowledgeable public on the functioning of the Government.The coverage of audit output by the media is rather meagre at the moment, though it is widely felt that the media is a great source for projecting audit views asreported in the CAG’s Reports to Parliament.

Despite the foregoing, however, audit in its role as an aid to administration would possibly take a back seat, not because its output is in any way not up to the mark, but due to the fact that the senior management in the Government have some apathy, firstly to go through the Audit Reports and more importantly to take any corrective action on that basis. Part of the reason for such inaction is also the fact that there is very little interaction between the senior officers of the auditee organization and the concerned Accountant General. The need for such interaction is now widely recognized though and improvements are taking place. Finally, the effectiveness of audit is directly dependent on the effectiveness of the PAC / COPU.For a variety of reasons, the effectiveness of PAC / COPU has been affected adversely mainly on account of huge arrears in discussion of Audit Reports in the States.Besides, a fractional output of the Audit Report is discussed in the PAC / COPU.

Shri R.R. Murarka, one of the most distinguished Chairmen of the PAC summed up the malaise in the following words:

“The ineffectiveness of the Public Accounts Committeeor Committee on Public Undertakings in moulding of financial management and correcting them in the light of irregularities brought out in Audit Reports is one of the greatest setbacks to the improvement in the financial management of the country.One can suppose that these things occur because of very loose accountability on the part of the executive and the lack of willingness to put the house in order.”

The question therefore, is how to get over these problems?While there are no easy solutions, our only hope lies in greater respect shown to the institutions and heightened accountability through better education and an awareness amongst the public servants that they are liable for their actions and can be held accountable for their mistakes and negligence.

3.5 Auditors introspection

The cynicism, the helplessness and the resort to philosophical escapades to keep oneself going notwithstanding, an auditor, like any other responsible citizen would like to contribute more towards the general well being of the society.Although the last decade or so has witnessed appreciable improvement in timeliness, relevance and reporting of audit, there are certain issues and areas that need more attention and decisions.

3.5.1 A role in curbing corruption

Should the mandated audit machinery be pressed into service as an instrument through a cluster of interlinked machineries and measures to curb corruption?Given the proportion of harm corruption is causing to the Indian polity & society, it is felt, it should.

With the vast experience ofIAAD and with little reorientation, telltale signs of corruption can be scooped out of plethora of records that pass through the eyes of auditors. Such telltale signs or pointers need to be taken note of quickly, examined further, investigated and remedial and / or punitive measures instituted promptly.This would require (i) a system of reporting , (ii) co-operation in investigation (networking), and (iii) dissemination.

  • i) The first thing to do is to establish a mechanism for early identification of matters which need prompt further investigation.There should be a unit for this purpose in each State Accountant General’s Office (and the important Principal Audit Offices at the Central level): perhaps a small Special Cell consisting of handpicked experienced persons who could review the results of audit on a monthly basis and pick out those cases which seem to warrant further investigation by the appropriate agencies. Once a month the Head of the Audit office could write a letter to the Government at the highest level (Prime Minister / Chief Minister), forwarding a note containing brief accounts of such cases. Simultaneously, a copy of the communication could also be sent to the Central Vigilance Commissioner or the corresponding functionary at the State level; or to the Ombudsman if one has been established.It would then be for the Ombudsman or CVC or any other authority to have the cases investigated further.There may be nothing to report in certain months, but a regular system of monthly reporting would provide an occasion to highlight matters that need attention, and could be useful as an early warning mechanism.
  • ii) The role of the Audit Department does not necessarily end with reporting.Its expert assistance may continue to be needed in the course of the investigations, whether by the CVC or the CBI or any other agency. If the evils of corruption, fraud or other grave irregularities are to be effectively dealt with, close collaboration among the various examining and investigative agencies would be necessary.This kind of ‘networking’ is perhaps best secured through a Special Committee for checking fraud and corruption, consisting of representatives of the CVC, the CBI and other such agencies (and similar committees at the State level); and the CAG should have no hesitation in associating his representatives with such Committees. The Committee should meet periodically - say, once a month - and review the progress of the investigations.In this context the Government’s setting up of an office on the lines of Serious Fraud Office in U.K. is significant.
  • iii) Apart from reporting and ‘networking’, the widest possible dissemination of the results of audit is essential for the enforcement of accountability.The present arrangements in this regard leave much to be desired.The CAG reports only to the Government, and it is the Government which lays the reports before Parliament (or the State Legislature); and it is only at that stage that the reports become public.Delays take place at every stage.By the time the reports are submitted, the events and transactions to which they relate would be at least a year old; further delays take place in the processes of considerationby theParliamentaryCommittee concerned.Thediscussion,

when it does take place, is very selective, and large numbers of paragraphs and even reports do not get discussed at all; and there are still further delays in the finalisation of the reports of the Committees, the Government’s responses in the form of ‘Action Taken Notes’, their consideration by the Parliamentary Committees, and their further observations.This protracted and dilatory process greatly reduces the meaning ofaccountability. It is clearly desirable that the irregularities and improprieties reported in the CAG’s Audit Reports should be taken note of promptly, discussed in the House, and appropriate actions instituted without delay; and it is even more important that knowledge of all this should be readily available to the general public.How can this be ensured?

In the first place, the audit reports themselves need to be expedited. There’s been considerable improvement in this regard over the years, but there is scope for further improvement. It has already been suggested that there should be a system of monthly reporting to the Government regarding cases which need investigation.This implies delinking of audit findings from the accounting cycle i.e. there could be special Audit Reports throughout the year as and when important audits are completed. Some special Audit Reports are already being submitted but the practice needs to be extended.The more concurrent the audit process becomes the more effective it will be.

These Special Audit reports need not necessarily be ‘thematic’; there could also be regular monthly or quarterly audit reports embodying the results of the audit of particular expenditures or receipts or sanctions or contracts or other decisions having financial implications, as distinguished from the audit of accounts.In other words, there would be an Annual Audit Report on the accounts, containing the CAG’s comments on the accounts, and a series of reports throughout the year on particular cases, and of course on special themes.(Where necessary, there could also be special reports even on serious failures on the accounting front).

These monthly or quarterly special audit reports will of course be made to the President / Governor in the same way as the conventional Annual Audit Reports.However, all these will be taken note of by a cell in the audit office, which will identify cases needing further investigation, and such cases will be included in the monthly letters/reports suggested above, and will come within the purview of the investigative agencies and the agencies and the Committee to check fraud and corruption.

That still leaves the question of dissemination.Should the monthly letters/reports or quarterly audit reports, etc., suggested above, be forthwith released to the press?There is much to be said about this.Everything should as far as possible be in the public domain.‘Transparency’ is the best safeguard against corruption, fraud and any other form of wrongdoing.It is understood that in the USA all GAO reports, unless classified for national security reasons, are available to the press and the public immediately upon issue or within a few weeks.It would be desirable to move towards that position.

3.5.2 Public Accounts

Enormous amounts of money are lost to the government on account of the chaotic state of the Public Accounts section of government accounts, a truly neglected area. This is a matter of serious concern for anyone interested in improving accountability.Unfortunately there are not many people who understand this area of accounts well.It will be necessary to locate a few at least, to broadly review the state of the suspense, remittance, deposit and loan sections of the accounts of the Central and State governments.Very large amounts drawn in the last weeks of the financial year remain unspent. Paid vouchers for selected months have to be given to local audit parties for verification with the cash book - this is seldom done, resulting in huge frauds remaining undetected.

3.5.3 Whistle Blowing

In some countries like the United States, fraud hotlines enabling the public to report cases of financial irregularities are provided.The GAO has a hotline working round the clock all through the year.Then there is legislation about whistle-blowers, under which any one with inside information can report wrong doings to the authorities and get handsomely rewarded if the allegations are found correct after investigation.They are assured full legal protection against reprisals. Australia and even conservative Britain have adopted legislation recently encouraging whistle-blowing.This will have very beneficial effects if introduced in India.

4. Accounts and Accountability - some serious concerns Accounts not only cover the maintenance of day books and ledgers relating to the day to day transactions but also include the preparation of periodic financial statements viz. Balance Sheet / Statement of Affairs as at a specified date, Profit & Loss Account / Income & Expenditure Statement for a predetermined period generally monthly, quarterly, half yearly or annually and Cash & Fund Flow Statements reflecting changes in financial position / Receipts and Payments Account for a specified period.

The function of accounting is to compile data and generate information relating to the operations/ activities of an organisation.Further, accounting not only generates reports and information reflecting the financial health of the organisation but also facilitates cost ascertainment and aids in performance education on the parameters of economy and efficiency.These constitute the main streams of financial, cost and management accounting.It is expected that the accounts would present a true and fair view of the state of affairs of the entity to which they relate, providing an objective and reliable yardstick or measure of assessing past performance and forecasting future trends.

In fine, the accounts are not merely statements but an instrument to ensure accountability, both within and without an organisation.This is true not only for commercial organisation but also for non-profit seeking organisation like trade bodies, registered co-operative societies, non-government organisations etc.

In the Government sector, there are many schemes operated by the respective departments on commercial principles where the performance of the scheme can only be assessed if there are separate accounts viz.proforma accounts.Further, Government invests in various autonomous bodies like companies, corporations, apex cooperative societies etc. where management is, in principle, divorced form ownership.Consequently, in the absence of accounts, the realisability of Government’s investment remains unknown. In addition, the Government routes a substantial quantum of developmental assistance through non-government organisations including District Rural Development Agencies (DRDAs) (Registered societies).Availability of accounts would give a complete picture of their utilisation rather than mere utilisation certificates which mostly parrot the sanction orders.Thus, in the Government sector, it is imperative that the compilation of accounts is current.

However, it is an unfortunate feature that the position of arrears in preparation of accounts by Government companies, Statutory corporations and departmental commercial undertakings in many States reflects a dismal picture.The Companies Act 1956 (Section 210) provides for presentation of accounts for a financial year within six months of the completion of the year at the annual general meeting of the company. Rule 4 of the Electricity (Supply) (Annual Accounts) Rules 1985 issued under Section 69(1) of the Electricity (Supply) Act, 1948 provides for submission of annual accounts and auditor’s report thereon to the Central Electricity Authority and to the concerned State Government within six months of the end of the financial year.DRDAs are to submit their accounts for audit by Chartered Accountants, latest by 30 June i.e. within three months of the completion of the financial year.Similarly, other statutes or the rules framed thereunder generally provide for submission of the accounts within a specified time frame.

In addition, Section 209(1) (d) of the Companies Act, 1956 also empowers the Central Government to direct maintenance of particulars of cost in the books of accounts for specified classes of companies engaged in production, processing, manufacturing or mining activities. Statutory auditor has to mention in the Audit Report, whether cost records prescribed have been maintained.Further, service companies are to maintain records allocating man hours utilized to the relative jobs to determine the cost of each job.

A study of the position of arrears in accounts of Government Companies and Statutory corporations up to the year 1999-2000 in respect of 14 States reflects that out of 654 companies accounts of 602 were in arrears, of which 360 were for 2 years to 37 years.Out of these, 151 companies were non-working, and the possibility of their assets having been misappropriated cannot be ruled out.Similarly, the accounts of 24 of the 62 corporations were in arrears for 2 years to 8 years and 26 corporations for 1 year.

The position of proforma accounts in the 56 operational departmental undertakings of 6 States was equally dismal since 54 accounts were in arrears, with as many as 10 since inception.In addition, accounts of 30 undertakings that had either been denotified, transferred or closed were in arrears indicating that the quantum of assets transferred or remaining unutilized was not known. Further, the positions of their dues/ receivables were not known along with the possibility of their recovery.

From the sorry state of affairs, it is apparent that although no distinction has been made in the provisions of the Companies Act between Private Companies and Government Companies with regard to preparation and finalisation of Accounts, Government Companies, throw all caution to the winds and refuse to become accountable in their spending of public funds.Unless severe and stern measures are initiated against Managing Directors of State PSUs who do not prepare accounts and submit them for audit, the whole exercise of audit will become farcical and lend ridicule to the institution of the CAG.Another alternative would be to bring State PSUs under a separate provision of the CAG’s DPC Act rather than the Companies Act as at present, with more teeth.

5. Organisational Issues

5.1 Organisational Structure

The Indian Audit and Accounts Organisation has a traditional pyramidical structure with the Comptroller and Auditor General of India at the top of the pyramid.The agenda of the Department functioning under the CAG is two fold:

Audit functions

  • § Audit of Governmental Expenditure and Receipts of the State and Union Governments

Accounting functions

  • § Compilation and certification of the accounts of the State Government
  • § Regulation and monitoring of entitlements of State Government employees

The C&AG is assisted by around 61,000 functionaries (Groups A,B,C,D) at various levels, spread around 105 field formations throughout the country.

5.2 Complexion of staff in the IA&AD

Over the last fifty years, the role of audit, as originally envisaged has grown to encompass progressively broader areas of functioning.Prior to Independence, the Comptroller and Auditor General’s audit was primarily confined to

  • Check against provision of funds
  • Check that all expenditure undertaken was consonance with rules and orders
  • All such sanctions to incur expenditure had the approval of the competent authority.

The post-Independence scenario has seen the inclusion of audit of receipts, both direct and indirect, audit of commercial enterprises and a constant increase in performance oriented audit.In a rapidly growing global economy, new areas of audit are opening up such as the audit of privatisation and audit of regulatory bodies. Considering the complex variety that faces the Department in this fast paced growth, it is worth meriting a look at the complexion of the staff peopling the Department.Recruitment of staff at both the officer level and the staff level are not of a specialised nature.Considering the fact that this is a predominantly finance-oriented department, if a certain degree of specialization is sought for during the recruitment process, a level of professionalism could enter the department, granting it a certain credibility which could be the basis for a certain amount of quality assurance.

Although the scope of audit has undergone tremendous changes as also interface with auditee organizations, the recruitment process of officers and staff still remains the same.To address the problem, revamping of recruitment criteria could be examined. Officers can be recruited through the UPSC as is being done now, but with certain specific qualifications as is done in the case of the Forest or Engineering Services.The minimum qualification should be a degree in accounts or commerce, particularly because of the audit responsibility involved.Adequate weightage could be subsequently considered for people having professional accounting degrees, or where they acquire one subsequently. At the Staff Selection Commission recruitment level,

  • trainee accountants can be recruited, who can be encouraged to finish the course while on the job and their confirmation can be subject to such completion within a specified time frame.
  • the new pattern of recruitment could be adopted in a phased manner by replacing vacancies at the Group ‘C’ level with qualified accountants who would come in as direct recruits into theGroup B cadre.
  • for clerical, stenographical and ancillary staffing, outsourcing of functions could be considered on an actual need basis as it would result in saving of administrative costs.At the moment salaries and allowances account for around 84% of the expenditure within the Department.
  • for areas such as Public Works and Forest Department audit, a special technical cadre can be thought of along the lines of the Commercial Wing recruiting pattern.
  • where relevant, specialists can be engaged onneed basis.

5.3 Performance Appraisal

Where Human Resources issues are being discussed, another area that could be reviewed is the system of Performance Appraisal that has been adopted. No doubt, it is as per the GOI guidelinesbut a suggestion for change could be made through the relevant channels.The present format is an exhaustive, subjective format and this subjectivity sometimes leads to results that are less than fair.Further considering the huge number of people in the Department on whom Appraisals have to be made and the paucity of time within which this has to be accomplished, it often leads to less than adequate importance being given to actual assessment of attributes as detailed in these Reports.The current format is too long drawn and descriptive. Further it really does not follow for constructive criticism as this more often than not is viewed as‘adverse’ remarks.

One option for moving away from this sort of an Appraisal System could be as is done in the case of Defence Personnel.Attribute based grading on a scale of 1 to 10 can be considered, with adequate weightage being provided for extreme scoring pattern.Thus, if a person has an extensive knowledge of rules and regulations but is a pathetic team person, he could score high on one scale and not so highly in the other.The average would moderate disparity in all cases. Where the score went below a particular grade, the officer could be asked to try and improve in such areas.Training could probably be patterned on such scoring.The final score would be a more holistic assessment of the person. For instance, if a person scores between 7 to 10, he could be graded ‘outstanding’ and so on.

5.4 Training

Human Resource training has been a high priority area in the IA&AD for quite a while now. Probably by reviewing the areas discussed above, this sort of sustained and intensive training could dovetail more effectively into the overall scheme of the Department and impart a greater credibility within the user group.

5.5 Union Activities and Welfare Measures

Union activities are an integral part of every office but are looked upon with a certain degree of disapproval by the Office Administration. The basic objective of both the agencies is to foster a work environment where welfare measures are put into place to address the needs of Staff as well as to have an effective mechanism for grievance ventilation and redressal. Establishing Quality Circles as an effective management tool can be thought of where a Committee is formed, comprising a representative from every level of cadres manning the office.This Committee can meet at predetermined intervals to discuss all issues, both professional and personal.

6. CAG’s (DPC) Act 1971

6.1 Developments

Two significant developments took place since the Act came into force:

  • Departmentalisation of accounts of the Union in 1976
  • Restructuring of the offices of State Accountants General in 1984 mainly for internal

specialization in the accounting and auditing functions in IA&AD.

Article 151 of the Constitution of India enjoins upon the CAG to submit his reports to the President or the Governor of a State who shall cause them to be laid before the Parliament / State Legislatures.The audit approach is completely non-political and Audit Reports are based on records and facts, which are got verified with utmost care and caution.

Section 23 of the CAG’s (DPC) Act gives full independence and discretion to CAG to regulate and decide the scope of his audit.For example discretionary forms of audit termed as propriety audit and the efficiency-cum-performance audit developed by the CAG are important forms of audit from the view point of ‘accountability’ in a comprehensive sense.Audit is a continuing developing discipline and has to cope with new administrative advancements and compulsions. At present CAG’s duties and powers are a watered down version of the intense debates in the Constituent Assembly despite the fact that the CAG of India is a unique institution having access to both Central and State Government’s financial transactions apart from the Public Sector and autonomous bodies financed wholly or partly by Central or State Funds.

The powers of the CAG to have access to the documents and information in connection with the audit of accounts had been enhanced under the Act, but there have been occasional problems in this regard since a lacuna was left that it should be produced in“as complete a form as possible and with all reasonable expedition”.

Denial of documents and information on the grounds of relevancy or otherwise, or delay in furnishing it, prevents the CAG from discharging the functions entrusted to him under the Constitution.Perhaps, a time has come to fully realise this lacuna and remedial steps taken for empowerment of the CAG with adequate authority to ensure prompt compliance in this regard.

There are still quite a few activities of Government bodies and authorities which are beyond the ambit of audit of CAG.It will be in the larger interest to bring such unaudited financial institutions within the ambit of CAG’s audit (Insurance, banking, cooperative societies etc.). This would enable more integrated appraisal of the national economy from the stand-point of accountability.

From the point of view of scope, extent and jurisdiction, deficiencies in the existing audit arrangements result, among other things, from changes in legislation and executive decisions that cannot be squared with the provisions of CAG’s (DPC) Act 1971 and the regulations made thereunder (Section 23).The Central Government’s recent directive that the State Governments send a request to the CAG under Section 20(1) of the Act in connection with Local Bodies Grants to the State Governments recommended by the Eleventh Finance Commission is an example. Since Local Government is a State subject the Central Government is here in effect urging the State Governments to make provisions for accounts and audit in the connected State laws as would serve its purpose.This shows that there is no appropriate provision in the Act whereby such roundabout ways can be avoided.In view of the above discussion, some major changes are called for in the CAG’s (DPC) Act 1971.

6.2 Functions of Comptroller and Auditor General in the case of grants or loans given to other authorities and bodies

Section 15 (1)

This section applies where any grant or loan is given for any specific purpose from the Consolidated Fund of India or of any State or of any Union Territory having a Legislative Assembly to any authority or body, not being a foreign State or international organisation, the Comptroller and Auditor General shall scrutinise the procedures by which the sanctioning authority satisfies itself as to the fulfilment of the conditions subject to which such grants or loans were given.

It is felt that Section 15(1) should suffice and the rest of the sub-section are redundant. The only logic should be that CAG should have discretion to audit, whenever any moneys are given to anyone by Government directly or indirectly in any form and it should have no ifs and buts attached by legislation.

6.3 Powers of Comptroller & Auditor General in connection with audit of accounts

Section 18 (1)

Under this section the Comptroller and Auditor General has the authority -

  • to inspect any office of accounts under the control of the Union or of a State and such offices responsible for the keeping of initial or subsidiary accounts, as submit accounts to him;
  • to demand production of any accounts, books, papers and other documents relevant to his audit,
  • to put such questions or make such observations and to call for information required for any account or report that he has to prepare.

Although at the outset, this section would read well, a few things are still wanting which need to be taken care of.Existing circular of Ministry of Finance enjoining all departments to produce all files requisitioned by CAG without any distinction should be incorporated in the section suitably so that it is part of the Act.Similarly, there should be a time limit for production of records at various stages.

6.4 Audit of Government companies and corporations

Section 19 (1)

The duties and powers of the Comptroller and Auditor General in relation to the audit of the accounts of Government companies shall be performed and exercised by him in accordance with the provisions of the Companies Act, 1956 (1 of 1956).

Here we have a major problem with Section 19(1)because unlike audit of revenues, audit of Government Companies is done under the provisions of Companies Act.If the provisions of Companies Act are amended or diluted, the provisions of CAG’s Act get automatically diluted. There is a need to audit the Government Companies as part of the CAG’s Act and as long as the taxpayer’s money is invested, CAG should be able to conduct performance audit and report on the Companies’ financial health.

6.5 Audit of accounts of certain authorities or bodies

Section 20

20 (1)This section is invoked where the audit of the accounts of any body or authority has not been entrusted to the Comptroller and Auditor General by or under any law made by Parliament. If requested so to do by the President or the Governor of a State or the Administrator of a Union Territory having a Legislative Assembly CAG shall undertake the audit of the accounts of such body or authority on such terms and conditions as may be agreed upon.

20 (2)The Comptroller and Auditor General may propose to the President or the Governor of a State or the Administrator of a Union Territory having a Legislative Assembly to undertake the audit of accounts of any body or authority, the audit of the account of which has not been entrusted to him by law.

The audit to the Comptroller and Auditor General can be entrusted only after giving a reasonable opportunity to the concerned body or authority to make representations with regard to the proposal for such audit.

This is again a consent audit of authorities or bodies which can be entrusted to CAG by the Government.There should not be any need to give any opportunity to the body or authority to make representation regarding entrustment of audit to CAG.If the Government feels it is in public interest, it should be done straightaway, as reference to any body or authority only delays the process.

6.6 Value for money audit

A specific section in the CAG’s Act is required authorising him to conduct value for money audit of any scheme / project of Central or State Government. At present it is being done by convention.

6.7 Interpretation

Though there are powers to make regulations etc., the CAG’s Act is silent on any power regarding “Interpretations”.Normally the interpretation rests with the concerned ministry, administering the Act. It should be part of the CAG’s Act that the issue of interpretation of the various sections should be settled by the CAG in consultation with the Ministry of Law.

6.8 Audit of Panchayati Raj Institutions (PRIs)

With the introduction of three tier Panchayati Raj System, CAG should be empowered under the Act to conduct audit of these organisations in any manner he deems fit, including nominating any organisations/individuals outside IA&AD to conduct audit on his behalf on the basis of guidelines issued by him.Since, audit is a Central subject, it is better to have a Central Legislation on the subject rather than each and every state government enacting a law entrusting or not entrusting audit of PRIs to CAG.

This audit normally falls under the purview of Local Fund Audit. However, keeping in view the fact that

  • more than 40-50% of the State Government expenditure and most of the developmental activities would be executed by PRIs and also,
  • majority of finances for these would be from Central funds

a legislation authorising CAG to take up audit at his discretion of these bodies would go a long way in strengthening the accountability as well as ensuring that the system of delivery of social empowerment is monitored closely by the Central Government as well as the Parliament.

6.9 Audit of international agencies

When the audit of UN was taken up by CAG of India, there were problems regarding provision under which CAG would conduct audit.The earlier proposal was shot down by the Ministry of Law on the plea that the Indian Parliament cannot enact a legislation for audit of organisations not under its control.But the international bodies setup itself envisages audit by member countries of its accounts.Hence, there should have been an enabling provision in the CAG’s Act that CAG of India can audit any international organisation, if India is a member country and if audit is entrusted to him with the consent of the Government.

6.10 Adoption of empowering provisions on the lines of other SAIs in Indian context

A scrutiny of the powers vested with the SAIs across the board indicates how helpless the institution of CAG of India is at present.Some of the suggested provisions can be adopted in Indian context and are as under:

6.10.1 Requisitioning records

While right to access at all reasonable times all the necessary documents is a common provision to all SAIs, in India, at present, auditees are obliged to extend all the facilities but there is no deterrent if cooperation is not extended.Therefore, there is need to strengthen the act to the effect that (a) No document can be refused on grounds of confidentiality as in the case of Japan and (b) Penal/disciplinary action can be directed by the CAG or the State Accountant General in case of non-compliance of request as in the case of Turkey and such direction should be binding on the Auditees and enforceable in law.

6.10.2 Testimonials

While SAIs of India, Korea and Germany have the powers to ask for required documents/accounts to be sent to desired place, other SAIs have right to examine under oath (Australia, Canada, Malaysia, New Zealand), power to summon (Thailand and Japan) or act as a court (France, Turkey, Germany). It is felt that power to summon would be desirable in the Indian context.

6.10.3Search and Seizure power

The search and seizure power is not available to the CAG of India.Such powers are available with some SAIs in the following manner:

  • (a) In relation to Government contracts to enter any land/building and inspect property (New Zealand).
  • (b) Power to enter any premises to search and seize any document (Thailand and Malaysia)
  • (c) Power to seal books of accounts and assets in case auditee is obstructing or sabotaging the audit work (China)
  • (d) Power to confiscate illegal gains/embezzled assets in case of violation of economic regulations (China)

It is felt that while (a), (b) and (c) above can be straightaway applied in the Indian context, (d) would require legal expert’s advice in case this is to be applied.

6.10.4Penal powers

In view of the total apathy towards audit in India, penal powers can go a long way in ensuring accountability of the executive.The position in other SAIs is as under:

  • a) May recommend for disciplinary action (China, Japan, Korea and Israel)
  • b) Penal provisions in case of obstructing audit investigations Australia - 1 year imprisonment
    France - Fine of 1 lakh Francs
    Korea - 1 year imprisonment or 5 million Won fine
    Thailand - 1 year imprisonment
  • c) Adjudicating power to decide whether an official is to indemnify the State (Japan)
  • d) Power to impose surcharge in case of deficiency/loss to the State (New Zealand)
  • e) Power to decide whether an accounting officer or any other person is liable for reparation (Korea)
  • f) Power to issue writs (Turkey)

In the Indian context (a) and (d) can be applied as it is, (b) and (c) can be recommendatory in nature.In case of (e), CAG of India should have powers to recommend if any government official is liable for reparation.

Invitation for Articles

The Journal of Management and Training publishes articles on accounting, auditing methodologies, finance, economics, management and training that are of professional and general interest as also book-reviews. Contributors are paid honorarium of upto Rs.2000 for an article and of upto Rs.1000 for a book-review.All readers are welcome to contribute original articles and write-ups that will help in the dissemination of professional knowledge and expertise.

Authors may send two copies of the manuscript of their articles / write-ups typed in double space, along with a floppy in MS Word. Articles submitted for publication in the journal should not have been published or submitted for publication elsewhere.

Articles and suggestions may be sent to:
The Director General (Audit)
Office of the Comptroller & Auditor General of India
10, Bahadur Shah Zafar Marg,
New Delhi - 110 002

Examined largely from the angle of the audit of the State Govt., bodies and authorities etc. of the State Govt.

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