Rakesh verma public audit english


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The Expanding Role and Increasing Responsibility of Public Auditors

Rakesh Verma, Principal Accountant General, India

The trend toward greater involvement and reliance on public auditors in public financial management will be a focus of this session.

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Rakesh verma public audit english

  1. 1. Expanding Role & Increasing Responsibilities of Public Auditors R.K. Verma, INDIA
  2. 2. STRUCTURE OF PRESENTATION <ul><li>Global crisis & response of Authorities. </li></ul><ul><li>Evolution of Public Delivery Models. </li></ul><ul><li>Determining ‘Public Interest’ </li></ul><ul><li>Private Auditors & Present Crisis </li></ul><ul><li>Public Auditors- their USP. </li></ul><ul><li>Public Auditors- their role. </li></ul><ul><li>Public Auditors- Indian perspective. </li></ul><ul><li>Public Auditors- Lessons </li></ul>
  3. 3. Recession & the Real Sector <ul><li>Significant impact in the Real Sector </li></ul><ul><li>2 variables tracked – Unemployment & Exports </li></ul><ul><li>Sharp increase in unemployment level, over very short periods, particularly in US, UK & Japan. (See Table) </li></ul><ul><li>The US unemployment figure rose to a high of 10.6% in January 2010. </li></ul><ul><li>Exports witnessed a free fall also. Particularly in case of Germany, Japan, Korea. (See Table) </li></ul>
  4. 4. Fiscal Response <ul><li>Use of fiscal policy through tax breaks, enhanced spending on infrastructure, subsidies etc. </li></ul><ul><li>United States has by far the largest package of fiscal actions, followed by Asia excluding Japan (See Table) </li></ul><ul><li>Fiscal responses need calibration to ensure deficits and debts are in check. Recent developments in Greece, Iceland a precursor of things to come perhaps for larger economies. </li></ul>
  5. 5. Monetary Authorities Response <ul><li>Central Bank have taken coordinated action in policy rate cuts </li></ul><ul><li>Softening of interest rates was broad-based and across the spectrum (See Table) </li></ul><ul><li>As crisis deepened, the interest rate channel became ineffective due to policy rates at zero or near-zero levels in the advanced countries </li></ul><ul><li>Restoring the functioning of credit markets and easing financial conditions </li></ul>
  6. 6. Monetary Authorities Response (Contd…) <ul><li>Measures focused reducing term interbank market spreads </li></ul><ul><li>Provided enhanced term funding to a wider range of institutions and against wider collateral than in the past </li></ul><ul><li>Direct lending to distressed institutions </li></ul><ul><li>Central banks forced to go for quantitative easing </li></ul>
  7. 7. Monetary Authorities Response (Contd…) <ul><li>Funds were provided to non-banking institutions to improve liquidity and reduce risk spreads in specific markets such as commercial paper, asset-backed securities </li></ul><ul><li>Support to Financial Sector as large as 20% of GDP as in case of UK (See Table) </li></ul>
  8. 8. PUBLIC ADMINISTRATION: DELIVERY MODELS <ul><li>Government /Public Sector </li></ul><ul><li>Joint Ventures </li></ul><ul><li>Public Private Partnership </li></ul><ul><li>Non Government Organisations </li></ul>
  9. 9. PUBLIC PRIVATE PARTNERSHIP <ul><li>UN definition- innovative methods used by the public sector to contract with the private sector who bring their capital, deliver project on time and budget while public sector provides these services that benefits public & effects improvements in quality of life. </li></ul><ul><li>India’s Planning Commission- Protection of user interests and the need to secure value for public money demand a more rigorous treatment of these projects. </li></ul><ul><li>Types of PPP- Build Operate & Transfer (BOT); Lease, Operate & Transfer(LOT); Build, Own, Operate (BOO); Design, Build, Finance & Operate (DBFO). </li></ul>
  10. 10. PUBLIC INTEREST <ul><li>Wikipedia : The public interest refers to the &quot;common well-being&quot; or &quot;general welfare.&quot; The public interest is central to policy debates, politics, democracy and the nature of government itself. </li></ul><ul><li>There is of course no settled position on what constitutes ‘public interest’. </li></ul><ul><li>In a globalised world this lends itself to even greater complexity. </li></ul>
  11. 11. PRIVATE AUDITORS & CRISIS <ul><li>Their appointment </li></ul><ul><li>Their emoluments </li></ul><ul><li>Independence </li></ul><ul><li>Conflict of Interest </li></ul><ul><li>Profession vs. Business Model </li></ul>
  12. 12. PRIVATE AUDITORS: SOME RECENT FACTS <ul><li>Lehman Brothers, Northern Rock, Fannie Mae, Freddie Mac, Bear Stearns, Merrill Lynch the big names that were struck in the ‘gale’ of recession. </li></ul><ul><li>Satyam, the large IT firm in India was beset by a huge financial fraud in early 2009. </li></ul><ul><li>In the case of Satyam, the remuneration of its auditors, Price Water House was dramatically raised 4.5 times (from Rs.9.2 million to Rs.42.1 million) over a 3 year period. Not only was the amount suddenly scaled up, it was much larger than similarly placed IT firms. </li></ul><ul><li>In the case of Lehman Brothers, the auditor Ernst & Young collected $110 million in fee over a 4 year period, of which $14 million was on tax and consultancy service. </li></ul><ul><li>Almost all of the world’s major listed Companies are audited by just five vast international accounting firms. </li></ul>
  13. 13. PUBLIC AUDITORS (SAI) <ul><li>Constitutional / Statutory Creature </li></ul><ul><li>Budget provided for in most cases </li></ul><ul><li>Scope of Audit vast – Financial, Compliance, Performance, not to mention, Information Technology Environment etc. </li></ul><ul><li>Reports laid in Legislature / in the Public Domain </li></ul>
  14. 14. COMPLIANCE AUDIT <ul><li>The International Organisation of Supreme Audit Institutions (INTOSAI) operates as an umbrella organisation for the external government audit. </li></ul><ul><li>Of the numerous Committees/ Sub Committees and Working Groups of INTOSAI there is one Sub Committee on Compliance Audit. </li></ul><ul><li>The Draft Compliance Audit Guidelines have been prepared under the Chairmanship of SAI, Norway. India is also an active member of this Sub Committee. </li></ul>
  15. 15. COMPLIANCE AUDIT <ul><li>Compliance audit is interrelated to the audit of financial statements and performed together with the audit of financial statements. </li></ul><ul><li>Compliance audit comprises the assessment of whether the activities, financial transactions and information reflected in the financial statements are in accordance with the authorities which govern them. </li></ul><ul><li>Such authorities may include applicable resolutions of the legislature, including budgetary laws or resolutions, and documented intentions and premises for such, provisions for funds and contracts, grant agreements, etc. </li></ul>
  16. 16. COMPLIANCE AUDIT (contd…) <ul><li>In addition, compliance audit is aimed at helping ensure sound public sector financial management and that public funds are collected and used for those purposes approved by the legislature or other appropriate bodies. </li></ul><ul><li>Compliance audit may also include aspects related to public expectations, especially in regard to the actions and behaviour of public sector officials. </li></ul><ul><li>Some SAIs regard compliance audit as a separate audit type altogether. </li></ul>
  17. 17. COMPLIANCE AUDIT IN INDIA <ul><li>Separate reports by SAI at Federal and Provincial levels </li></ul><ul><li>Sectoral compliance audit reports- direct taxes, indirect taxes, defence services, civil departments, railways, scientific departments </li></ul>
  18. 18. PUBLIC AUDIT IN INDIA- RECEIPTS <ul><li>Compliance audit of receipt entails a review by CAG of assessments, collection and accountal of revenues- both tax and non tax, for the Centre and States. </li></ul><ul><li>In the case of Union Direct and Indirect taxes alone for a 5 year period till 31 March 2008, the CAG pointed out, in Reports tabled in Parliament findings with a tax effect of Rs 235,830 million. </li></ul>
  19. 19. PUBLIC AUDIT INDIA- SUPPLEMENTARY AUDIT <ul><li>Auditors of State run Public Sector Companies appointed by the CAG of India. </li></ul><ul><li>CAG has the power to direct the manner in which the company's accounts shall be audited by the auditor. </li></ul><ul><li>aforesaid auditor shall submit a copy of his audit report to the CAG who shall have the right to comment upon or supplement, the audit report in such manner as he may think fit. </li></ul><ul><li>Any such comments upon, or supplement, to the audit report shall be placed before the annual general meeting of the company </li></ul>
  20. 20. PUBLIC AUDIT INDIA- Of PSUs <ul><li>As on 31 March 2008, there were 419 central government Public Sector Undertakings (PSUs) under the audit jurisdiction of the Comptroller and Auditor General of India. </li></ul><ul><li>In addition there were hundreds of State PSUs under the audit jurisdiction of the CAG. </li></ul><ul><li>The CAGs review includes deviations from accounting standards, corporate social responsibility. </li></ul><ul><li>CAG also undertakes Performance Audit of Public Sector Undertakings both at the Central and State level. </li></ul>
  21. 21. AUDIT OF PRODUCTION SHARING CONTRACTS (PSC) <ul><li>PSC have been in operation in China, Indonesia, India, Bahrain, Qatar, Oman etc. in the oil sector for a while. </li></ul><ul><li>An agreement between Contractor and Government whereby Contractor bears all exploration risks, production and development costs in return for its stipulated share of production resulting from this effort. </li></ul><ul><li>Profit Petroleum shall be shared between the Govt. & the Contractor on the basis of provisional estimated figures of Contract Costs, production, prices, income and any other income or allowable deductions etc. </li></ul><ul><li>CAG of India has recently conducted audit of private operators to ascertain the correctness of shares. </li></ul>
  22. 22. AUDIT OF REVENUE SHARING <ul><li>Private telecom operators are to report revenue figures on the basis of which licence fee and spectrum fee payable to Government is calculated. </li></ul><ul><li>In the telecom sector the CAG of India has initiated audit of books of top telcos to ensure that they are not short-charging the state of its share of revenue. </li></ul>
  23. 23. PUBLIC PRIVATE PARTNERSHIP AUDIT <ul><li>INTOSAI issued its PPP Auditing Guidelines in 2001. </li></ul><ul><li>CAG of India has issued Public Auditing Guidelines in case of PPP in 2009. </li></ul><ul><li>PPP contracts are notable in India in infrastructure sector- highways, airport development and in the Railways. </li></ul><ul><li>Public audit justified on grounds that Govt/public agency continues to retain accountability for provision of service, transfer of public assets to private body for contracted duration requires involvement of audit, provide assurance that the PPP arrangement has yielded value for money and public interest has been protected. </li></ul>
  24. 24. PPP AUDIT IN INDIA <ul><li>CAG’s audit of express way PPPs in India revealed that: </li></ul><ul><li>The period of concession allowed to the Concessionaire for two projects (Jaipur-Kishangarh and Delhi-Gurgaon) based on a reasonable Internal Rate of Return and the cost of borrowings should have been 12 and 14 years instead of 20 years. </li></ul><ul><li>The period of 20 years was fixed arbitrarily without developing any financial model to indicate the benchmark IRR which would determine the optimum concession period within which the Concessionaire would recover the capital cost besides earning a reasonable return. </li></ul>
  25. 25. CAG’s audit of PPP contd <ul><li>In a third express way project (Tambaram-Tindivanam express way) the total project cost estimated by the lowest bidder was Rs 3780.7 million against the DPR estimate of Rs 5643 million. </li></ul><ul><li>The variation of 33 per cent of the DPR estimate indicated an unrealistic estimation of by the DPR consultants. </li></ul><ul><li>The Authority neither analysed the reasons for this nor held the consultants accountable in any way. </li></ul>
  26. 26. LESSONS <ul><li>Large intervention by public authorities to stabilise the financial system during the crisis have been done perhaps in the larger ‘public interest’, sometimes on grounds like ‘too big to fail’. </li></ul><ul><li>The role of Regulators, Credit rating agencies, private audit firms have been questioned in varying degrees. </li></ul><ul><li>Important to agree on the scope of public interest, in a if limited but definitive sense as a lesson from the present crisis. </li></ul><ul><li>Device referees who are autonomous, independent, not funded by the entities under scrutiny and can provide assurance that public interest is protected. </li></ul>
  27. 27. EXPANDING PUBLIC AUDIT <ul><li>Strengthen Compliance Audit Practice. </li></ul><ul><li>Making a Determination of “Public Interest”. </li></ul><ul><li>This should include expanding the existing idiom of public interest to include those considered ‘too large to fail’. </li></ul><ul><li>Consider option of Supplementary Audit by Public Auditor on a basis, that maybe deviced, where public interest is involved. </li></ul>
  28. 28. Table: Economic Concept Unemployment Rate (% Rate) Country and Group Annual 2008 Monthly Nov 2009 Brazil 7.9 8.0 Germany 7.2 7.0 Japan 4.0 5.0 Russian Federation 8.4 8.2 United Kingdom 5.7 7.6 United States 5.8 9.4 Source: International Financial Statistics (IFS)
  29. 29. Table: Economic Concept Exports of Goods (% of GDP) Country Annual 2008 Quarterly 2009 Q3 Brazil 12.1 9.8 Germany 39.6 33.0 Japan 16.1 12.2 Korea Republic 45.4 42.0 Russian Federation 28.1 24.2 United Kingdom 17.1 16.2 United States 9.0 7.4 Source: International Financial Statistics (IFS)
  30. 30. Policy Rate Cuts in Advanced Countries Country/Region Key Policy Rate Change in Policy Rates (Sept 08- Mar 09) Australia Cash Rate (-) 400 Canada Overnight Rate (-) 250 Euro area Interest Rate on Main Refinancing Operations (-) 275 Japan Uncollateralised Overnight Call Rate (-) 40 UK Official Bank Rate (-) 450 US Federal Funds Rate (-) 200 Source: International Monetary Fund, websites of respective central banks and the Economist
  31. 31. Table: Support to Financial Sector as on June, 2009 (as % of 2008 GDP) Sl. No. Countries Upfront Government Support 1. France 1.6 2. Germany 3.7 3. Japan 0.8 4. United Kingdom 20.0 5. United States 6.9 6. Brazil 0.0 7. China 0.0 8. India 0.4 9. Russia 2.3 Source: IMF Staff Position Note, fiscal affairs department, International Monetary Fund, November,2009
  32. 32. Table: Fiscal Stimulus Packages Announced for 2009-10 (as of January 17, 2009) (As a percent of GDP in the region) 2009 2010 United States 1.9 2.9 Tax cuts 0.9 1.2 Infrastructure 0.3 0.8 Other 0.6 1.0 Euro Area 0.9 0.8 Tax cuts 0.3 0.3 Infrastructure 0.4 0.0 Other 0.2 0.4 Asia excluding Japan 1.5 1.3 Tax cuts 0.1 0.1 Infrastructure 1.1 0.0 Other 0.3 1.2