Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Audit as a State Function


Published on

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.

Published in: Technology, Business
  • Be the first to comment

  • Be the first to like this

Audit as a State Function

  1. 1. 1 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
  2. 2. 2 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
  3. 3. 3 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,
  4. 4. 4 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
  5. 5. 5 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.