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Audit as a State Function

By Sanjay Sahay

Introduction

Democracy provided a major leap in the political governance of the world, radically different

in creation and control mechanisms of governance, based on the concept of a nation state.

Nationhood got a push and many got created in the post Second World War world. Democracy

though in its nascent stages in most of the countries had a very clear cut road map, compared

to any of the systems experienced in human history. The fundamentals of a sovereign nation,

with clear cut distribution of powers between legislature, executive, judiciary, with a strong

fourth estate, all synergizing seamlessly with rule of law providing the common thread.

The world lapped the democratic concepts of sovereignty, good governance, checks and

balances system, all geared to the greater good of the vast majority, who had remained

unheard for centuries. Political administration is superficial without it being ably supplemented

by the financial administration. On the financial administration depends the financial strength

of the nation and the real well being of the citizens, to which any democratic government is

committed to, by law. The way money is spent is a clear cut indicator of economic well being

of the nation and the welfare of its citizens. Audit is the tool to measure the well being of

the nation on this parameter and that all its units are running fine and the funds thus spent

are in public interest.

Present Scenario

With Commonwealth Games, 2G and the Coalgate, the role of Audit and the CAG of India has

been thrown on to the centre stage of Indian thought process and its psyche. What more the

organization can do to stem the rot? Are some sectors completely uncovered? Is performance

audit enough to gauge the financial health of the nation, or is there a need for a combination

of audits? What is the role of the private sector in the misuse of governments funds and

should they also come under the scanner? And added to that the final question shrouds around

the veracity of the private sector audit. Can complete audit of the nation not become a state

function as in case of lot many other tasks so efficiently being performed by the

Government.

What is Audit

What is audit? Audit an official inspection of an individual's or organization's accounts,

typically by an independent body. It is the backend process that brings financial integrity into

the governmental and private sector’s receipts and expenditure. It is the validation of the

funds rightly earned, used and spent. It is the logical conclusion to the sound accounting

procedures. Audit is a legal requirement and as with every other legal requirement has to be

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mandatorily fulfilled. Sound auditing complements sound accounting and vice versa. There are

clear cut, neatly laid auditing standards for the government audit. These standards are often

referred to as generally accepted auditing standards, are to be followed auditors and audit

organizations as required by law, regulation, agreement, contract or policy.

CAG

The Comptroller and Auditor General (CAG) of India is a constitutional authority, who audits

all receipts and expenditure of the Union Government and State Governments and bodies and

authorities substantially financed by the government. It is an external auditor for government

owned companies. CAG is the head of the Indian Audit and Accounts Department. The

department is free of control of any executive authority. It acts as a financial watchdog and

it the most critical element in checks on the government. Audit in government has become

synonymous with CAG.

It would not be out of place to quote Dr. B.R. Ambedkar regarding the role of CAG:

“I am of the opinion that this dignitary or officer (C&AG) is probably the most important

officer of the Constitution of India. He is one man who is going to see that the expenses

voted by the parliament are not exceeded, or varied from what has been laid down by the

Parliament in what is called Appropriation Act. If this functionary is to carry out the duties –

and his duties, I submit are far more important than the duties of the judiciary.”

CAG Duties

CAG has been dutifully fulfilling all its constitutional duties of prescribing the form in which

accounts have to be maintained, perform duties regarding the accounts of the Union/States as

prescribed by law and report to the president, governor on the state of account of

country/state. It’s the double role of the CAG, that has brought it into national and

international limelight and is seen as the savior of the nation. As the Auditor General of India

firstly it checks the application by the government servants of rules and regulations, secondly,

on behalf of the legislature, that the actions of the government have been in accordance with

the views and requirements of the legislature. The purpose of audit is to “offer financial

criticism” and its value lies in pointing objectively the financial impropriety of certain

transactions and suggesting suitable actions to rectify it.

CAG Role

Undeniably, last few years have proved the great thought gone in, in creating this institution

by the framers of our constitution and its worth, utility and the capability to initiate

transformational change in the governance of this country is a matter of a hot debate in the

public domain now. I hope it would bring about path breaking changes which the nation has

been waiting for years. Suffice to say, at the present moment, that CAG relies on the

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performance audit and that too sample based which might not be as effective and as intensive

and intense as these monumental changes would demand. As they say, the beauty lies in the

details! The scale of performance audit ought to be extended to all departments and all

sectors where government funds are expended.

Performance/Financial/Physical Audit

The role of financial audit cannot be underestimated. The rigors of day to day accounting has

be to maintained with unimaginable levels of financial propriety if viewed from today’s

standpoint. A thorough financial audit would lay the foundation for an ideal performance audit

and the final findings would be a totality of all issues, all stakeholders, legal and financial

requirements. It is suggested that the CAG should be the sole agency to uniformly conduct

such audits across sectors/governments, all throughout the process of the utilization of

government funds. The scope and plan of every department/organization is the guide to the

Performance Audit process. It would be out of place to suggest the review of these guidelines

and scope in tune with the present auditing thought process and procedures which brings out

ideal levels of transparency and is in common knowledge and usage of all, who are a part of

the routine function of the organization/department.

Winning Combination

While a combination of financial and performance audit is bound to satisfy technically the

needs of audit and financial propriety on paper and to a considerable level on the ground, the

ideal situation would be an intensive physical audit on the guidelines laid down and on the

accepted procedure. The gap between the written word and the real infrastructure seems to

widening at a breathtaking pace since the British left this country. Without being judgmental,

the state of governmental buildings at least in large parts of India, stands testimony to the

urgent need of third party testing and physical audit to become the order of the day.

Finality

Finality is the issue. Findings cannot be value based. It has to be irrefutable facts. Instead

of clearing the dust and the heat it cannot afford to be marred in one. The right synthesis of

financial, performance and physical audit seems to the panacea to the ills plaguing the audit

scenario in this country. Complete objectivity based on empirical facts has to the final touch

point. The finality issue can also be sorted out by uniformity of application of standardized

mandatory guidelines across the length and breadth of all departments, undertakings,

institutions, organizations, public limited companies in this country. The ghost of relativity

should not loom large over this issue.

Distribution of Public Funds

Recent years has seen a paradigm shift in the manner in which public funds are generated,

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expended and managed. Over 67% of Central Plan and Non-Plan grants are disbursed directly

to the implementation agencies like NGO’s, developmental funds are directly transferred to

urban local bodies and PRIs and infrastructure projects are substantially being financed

through public – private partnerships. Facts are stranger than fiction. There are increasing

instances of central ministries seeking exclusion from the audit of CAG of new institutions

created or being created. Regulators like the TRAI, Petroleum and Natural Gas Regulatory

Board etc have been kept fully or partially out of the audit mandate of the CAG through the

respective Acts.

Tendency to remain out of Audit Control

The tendencies to use methods to remain out of audit controls or independent of Government

audit does not bode well for the country. Financial discipline and propriety is the key of

financial administration of the country. The audited accounts of the government few years

back showed large discrepancies in the funds doled out to the NGOs. The comprehensiveness

of audit by way complete coverage of the whole funding mechanism of the government and its

intensiveness would take a long way in the direction of providing quality spending to every

single paisa spend by the government.

CAG Audit Coverage

With the government and NGO’s being fully covered by CAG audit in relation to the

government funds, there is still large quantum of the economy which remains uncovered by the

CAG auditing scope and yet pertains to the public money invested in public limited companies.

From the Harshad Mehta case to the current day Satyam, the saga continues, the Welfare

State and its citizens cannot find solace in existing auditing norms, practices and the

transparency made available to the investors and the country. When IPOs are public

knowledge to the minutest details, why not the health of the company based on financial and

performance audit conducted by a third party constitutional authority which functions on the

final touchstone of finality in its findings. The Supreme Court of India does not go wrong and

the same sanctity goes for the CAG created under the same constitutional mechanism for the

larger good of the maximum number of the citizens.

Private Sector Audit

There are umpteen instances of the havoc the citizens are meted with because of bad

business practices, stock market scams and lack of transparency in the public limited

companies. It is not my case to comment on their functioning but there is certainly a strong

case to bring them under the ambit of common audit as it serves the principles of economic

well being of the citizens and the state in a much better manner and that the state is

comfortable with the functioning of these companies. A Reliance can change the life of lakhs

of its shareholders and innumerable others in the manner it affects them directly and

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indirectly. Not that such companies are created just like that, they are jewels of the nation

and have to be maintained in that manner. A positive monitoring and supervisory mechanism

certainly helps in this process. The role of the Government has been commendable in the

manner Satyam was resurrected to its early glory and the company functioned once again as it

should have been despite the major tragedy that hit it. Nobody is denying the vagaries of the

stock markets or monumental shifts in the international business, all I am trying to say is that

it would add to the health of the company, citizens of this country and the country itself.

Issues/Findings/Suggestions

The discussion in the preceding paragraphs sets final agenda for improving, reforming and

enhancing the effectiveness of audit in this country. What stands established is that in

totality, audit is a measure and an indicator of the economic well being of the nation, the CAG

probably is the most important officer of the Govt. of India and the veracity of the private

sector audit is not beyond doubt.

What the country needs for a transformational audit and financial regime is firstly the CAG

audit should have a scope to audit every single penny spent by the governments with no

exceptions whatsoever, either organizations or heads of account. Secondly, it should be both

comprehensive and intensive and under no circumstance sample in nature. Thirdly, the

synthesis of financial, performance and the physical audit holds the key to the auditing

success/excellence. Fourthly, finality of findings should be touchstone. Fifthly, whole of

private should come under its ambit to the tune of investment of people’s money and summing

up all the above, finally, CAG, should be the only and the final auditing authority in the

country. The logistics for this mammoth exercise on a yearly basis should be put in place

simultaneously with the expansion of the scope of audit of the CAG.

Conclusion

The state should be the only auditing authority in the country and should work on prescribed

auditing standard operating procedures. The uniformity and objectivity of this audit would

improve the quality of expenditure in the governmental and the private sector and we would be

in the striking distance of achieving the goal of maximum good for the maximum citizens out

of the public funds of the nation.