The Comptroller and Auditor General of India is almost one century and a half century old institution, which was formulated during the British rule to safeguard Government money. However, after independence, our leaders and policy makers redefined the role of the institution to meet the growing need of the independent nation and safeguard the interest of the general public as a whole in the democratic set up of India. The CAG has evolved its role as friends and representatives of the public and is constantly working for safeguarding the hard earned taxpayers’ money and ensure whether it is properly used; also, CAG has portrayed its independent nature by not getting influenced by the Government and Parliament/ Legislature. The domain of influence of CAG is wide and vast; it covers not only the Central Government, but also the State Governments, and it track the money from the Centre and the State capitals right down to its actual utilization at the Gram Panchayat and Block levels.
The duties and powers of the Comptroller and Auditor General of India are laid down in the Articles 149—151 of the Constitution of India and the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, L971 (56 of 1971) and amendment Act, 1976 (58 of 1976).
Some of the key role that CAG has been playing is as follows:
Ø Assessing the performance of Government Departments and institutions, and how efficiently and effectively they have executed their assigned roles.
Ø Verify how various social sector programmes and key projects in the infrastructure sector have been properly implemented.
Ø See how efficiently and effectively Government undertakings in different industrial sectors are functioning, and also whether disinvestment of Government shareholding in some of these undertakings was carried out properly.
Ø Defence, policing and security related subjects are covered by us exhaustively.
Ø Examine whether the accounts of the Central and State Governments are properly maintained, and also see whether tax revenues to Government are assessed correctly and collected in full.
Some of the recent and noteworthy audit reports are on NREGA, National Rural Health Mission, Mid‐day Meals Scheme, Sarva Shiksha Abhiyan, Accelerated Irrigation Benefits Programme, Expenditure on Common Wealth Games, 2G Spectrum Allocation etc.
Let’s have a look at the concept of good governance. Good is one which is just, fair, right and moral while governance, according to the World Bank “Governance is defined as the manner in which power is exercised in the management of the country’s economic and social resources for development.” And according to Aedrian Leftwich “Good Governance as a system: (i) to promote open, market friendly and competitive economy; (ii) democratisation and ; (iii) improvement in human rights record.”
Some of the parameter of Good Governance as defined by the World Bank are as follows:
Ø Political accountability, including the acceptability of political system by the people and regular elections to legitimise the exercise of political power,
Ø Freedom of association and participation to various religious, social, economic, cultural and professional groups in the process of governance.
Ø An established legal framework based on the rule of law and independence of judiciary to protect human rights, secure social justice to guard against exploitation and abuse of power.
Ø Bureaucratic accountability including openness and transparency in administration.
Ø Freedom of information and expression needed for the formulation of public policies, decision making, monitoring and evaluation of government performance.
Ø A sound administrative system leading to efficiency and effectiveness. This, in turn, means cost effectiveness.
Ø Cooperation between government and civil society organisations.
The Government accounting system in our country is rule based. Basic principles of Government accounts are enunciated in the Government Accounting Rules and other related rules framed under the Constitution. These rules which form the foundation of the Indian accounting system have been framed by the Ministry of Finance on the advice of the Comptroller and Auditor General of India. Supplementary or subsidiary rule making power is delegated to the State Governments or subordinate Departments and is to be exercised by them on advice of the C&AG.
As Government accounting in India is predominantly on cash basis, there is hardly any correspondence with private sector accounting principles except in cases of commercial undertakings of Government departments. The operational results of commercial undertakings are expressed in normal commercial form outside the general accounts of Government under preformat accounting practices stipulated in the Government.
Accounting Rules: The accounts of Government Companies and Statutory Corporations, however, are maintained on an accrual basis while the system of accounts of urban Local bodies like Municipal Bodies varies from entity to entity ranging from modified cash to full accrual basis. Government’s preference for cash based accounting system is largely historical and driven primarily by considerations of budgetary control and the perceived simplicity and certainty of a cash based system.
However, there is a realization that the existing Government accounting system in India needs to be reviewed. An Advisory Group on Fiscal Transparency set up by the Reserve Bank of India, the Central bank of the country, has emphasised the need for greater transparency in Government accounting. The Advisory Group has highlighted the essentiality of improved disclosure norms for government debt, subsidies, off-budget Government borrowings, contingent liabilities and revenue exemptions granted by the Government.
A recent study of State level accounting practices by the World Bank also has concluded that the existing system needs a review as the finance accounts of the States suffer from many infirmities. They do not represent the position of the State in totality.
For instance, the so called off-budget borrowings are outside the ambit of the Finance Accounts. The practice of year end transfers to the Personal Deposit Accounts to avoid the lapse of the budget provisions creates distortions in the Annual accounts by inflating revenue expenditure and budget deficit. Current accounting rules permit practices like booking of transactions temporarily under “suspense” heads. But these exceptions have been misused affecting the quality and completeness of accounts.
The main criticism of the current system is that it lacks transparency and cannot be used either for meaningful cash management or rational resource allocation. The system also suffers from a lack of uniformity in measurement norms and inadequacy in disclosure standards in financial statements. It is felt that there is need for clear public sector accounting standards to enhance transparency and accountability of the government to the stake holders.
In response, the Government has approved the establishment of a Government Accounting Standards Advisory Board by the Comptroller and Auditor General of India and I am happy that this Board is actively collaborating with national and international experts through various seminars. Comprehensive reform in Government accounting systems in other countries has been sparked off largely by a need to move to an accrual-based system from a cash based system. While no such decision has been taken in India, some pilot exercises have been proposed by the Controller General of Accounts and based on the experience of these exercises, the future course of action will be determined.
However, any accounting reform has to be a part of a larger integrated public financial management initiative. A strong political consensus on a new direction for the accounting system is essential before any overhaul of the system is undertaken. This consensus has to be achieved not only in the centre but also in the states. As there is no clearly established theory of a relationship between financial reporting of a particular type and the wellbeing of the people; political consensus not technical issues will determine the success of accounting reform. This is likely to take time to get fructify and get implemented.
On the other hand development imperatives and the rapid pace of globalization of the Indian economy along with the increasing convergence of accounting standards the world over require us to move quickly.
The first requirement would be to develop a “conceptual framework” which clearly defines the objectives of financial reporting in the new circumstances and then set and implement a road map on how to achieve these objectives. Our aim should be to reduce diversity in an increasingly globalised world, particularly on issues of measurement and disclosure. There is also a growing agreement about the need for a dramatic improvement in the publication, communication and usability of financial accounts of the Government. We have to look for best practices internationally.
Another related issue that we will have to consider in due course is that of harmonisation of the system of Government financial statistics with the changes proposed in the accounting system. International and country experiences in this matter are fairly extensive and well known. In fact, being a late comer we may have the benefit of the experience of others.
Role Assessment in Good Governance
The key idea of the Communications Campaign is to project the effectiveness of audit by the CAG as a Constitutional Authority; to bring about enhanced awareness in the public about its audit functions; projection of the importance of his audit reports; and to show how useful these audit reports are useful for proper utilization of the hard‐earned taxpayers’ money for the public good, and for promoting good governance and accountability in general. The mission of the CAG is to promote good governance through high quality auditing and accounting. CAG provides independent assurance to his stakeholders –the Legislature, the Executive and the Public – that public funds are being used efficiently and for the intended purposes.
Purpose of this campaign
The purpose of this campaign is two‐fold:
a) To spread awareness about what our role is, what we have said (on various key programmes etc.), and how people can get access to our reports;
b) To provide a channel for receiving feedback from the public as to what areas of needs to be audited e.g. areas of fraud/ waste/ mismanagement; programmes/ services whose benefits are not reaching the common man; roads, hospitals, schools and other social/economic infrastructure which is not functional or functioning poorly etc.,
Increase Responsibilities of CAG
In India, government accounting has operated within the framework of legislative accountability by means of specific financial reporting and budgetary control practices under a predominantly cash based system of accounting. However, during the last few decades, many governments in a similar position have taken initiatives to transit from cash accounting to accrual accounting or some variant of accrual accounting. An accounting method that measures the performance and position of a company/enterprise/state by recognizing economic events regardless of when cash transactions occur has been used. The general idea is that economic events are recognized by matching revenues to expenses (the matching principle) at the time in which the transaction occurs rather than when payment is made (or received). This method allows the current cash inflows/outflows to be combined with future expected cash inflows/outflows to give a more accurate picture of a company's current financial condition
There is in fact a growing convergence between public and private accounting standards and practices. Therefore, a need to revisit the conceptual underpinnings of government accounting systems has been felt in India largely due to realisation of deficiencies in the cash based system particularly for purposes of modern financial management and the need for greater transparency and user friendliness. The driving force behind accounting reform is the achievement of effective accountability.
Two issues that need particular attention in this regard are the establishment of appropriate financial reporting standards and the development of new accounting skills in government accountants. I am sure, professional development programmes of this nature would enlarge the understanding of the issues involved in formulating standards and help in the development of skills amongst government accountants.
At international level, the International Organisation of Supreme Audit
Institutions (INTOSAI)’s Standing Committee on Accounting Standards has issued a ‘Framework of Accounting Standards’ for governments, which provides valuable guidance to governments in this matter. IFAC’s Public Sector Committee has also issued Cash Based as well as Accrual Based Accounting Standards.
A Government Accounting Standards Advisory Board
(GASAB) have also set up. The basic objective of this initiative is to promote best practices on the basis of generally accepted principles of Government accounting and steer a gradual course in reforming our accounting system. The Board is responsible for not only formulating and proposing Government Accounting Standards to improve the usefulness of Government’s financial reports based on the need of the users but also to keep these Standards current so as to reflect changes in the international environment. I am sure the GASAB will be enriched by sharing of experience and practices of other standard setting bodies.
Role of CAG in Public Private Partnerships (PPP)
Public Private Partnerships (PPP) implies the coming together of two dominant but divergent sectors of the economy, each with different prescriptions and objectives, for the overall development of the community. Public Private Partnerships have emerged as one of the latest and successful instruments of public finance, and are increasingly adopted by both developed and developing countries for building and rebuilding their infrastructure framework. The Eleventh Five Year Plan accords high priority to PPP projects both in the Central and States’ Plan initiatives in the endeavour to overcome the yawning infrastructure deficits that face the country.
The basic intent of PPP is to encourage the private sector to dedicate its capacity to raise capital and the ability to complete projects on time and to budget for the welfare of the community, without having to compromise the profit motive. At the same time, the public sector would retain its responsibility to provide goods and services to the public at large at affordable rates. This arrangement, indeed, calls for a judicious approach to decision making and underscores the need for a framework that enables the private sector partner to make reasonable returns on investments without diluting the standards and quality of services provided. The key to the success of PPP projects is a balanced and fair sharing of risks and benefits between the partners, and transparency and accountability in all transactions relating to the award and management of the contract.
The International Organization of Supreme Audit Institutions (INTOSAI) has been engaged, over a long time, in developing comprehensive guidelines for the audit of PPP Projects. In pursuance, INTOSAI had issued its PPP Auditing Guidelines in 2001, followed by certain comprehensive recommendations based on the findings of a dedicated workshop on PPP Audit in 2007. These are indeed valuable and are followedby members of INTOSAI. However, the need to develop a set of guidelines customizedto the requirements of public sector auditors in India particularly those authorized to carry out audits under the mandate of and powers vested in the Comptroller & Auditor General of India has been keenly felt in the recent years. These Guidelines are the outcome of the efforts made in that direction.
These Guidelines are comprehensive and cover various aspects of PPP contracts and management, as they are conceptualized and developed in India. The Guidelines have been fashioned to test the transparency, accountability, and value for money aspects of the PPP project activities as also compliance with the norms and procedures established by the Government of India and the Planning Commission. As regards the regulatory issues in a PPP Project, the audit guidelines on Performance Audit of Regulatory Bodies shall apply. It is expected that staff and senior officers of the IA&AD who are responsible for carrying out public sector audits in India in accordance with the mandate and powers of the Comptroller & Auditor General of India1 would find the clarifications and explanations relating to the various stages and aspects of PPPs and the audit criteria included in these Guidelines very useful and practical.
Like all such documents, these Guidelines also have to be seen as a ‘living document’ and would need periodical updating and modifications. Meanwhile, public auditors who are employed on this challenging and emerging area of audit may use the guidance provided in the Guidelines as a reference manual to fine-tune their work. Care has been taken to avoid mistakes and errors in the Guidelines. However, if any such instance has unfortunately crept in, they may be brought to notice for rectification in the next edition. Suggestions for the improvement may also be sent to the Director
Scope of Public Private Partnership Audit
A contentious issue in the context of PPP arrangements and their audit relates to the scope of audit by Supreme Audit Institutions (SAI), in view of the following:
- The government or the public sector partner is usually only a minority partner /shareholder or will have only minority participation in the PPP arrangement, with the private sector partner controlling the majority stake.
- Most of the funds are brought in by the private sector partner.
- The construction, management and operational risks are transferred to the private sector partner.
- The work culture and the decision making processes of the private sector partner which may be alien to and contra-distinct from those of the public sector institutions.
- The emphasis of PPP projects is usually on the end results of the PPP arrangements and not on the means to achieve them.18
3.1.2 Nevertheless, the following broad considerations would support the intervention of public audit in PPP projects:
- The authority of the government / public entity to provide the goods and services to the public at affordable cost stands transferred to the private sector partner.
- The right to levy tolls / user charges also gets shifted to the private sector partner.
- The cost of executing the project directly by the government or its agency may be relatively lower since they are able to raise funds (either from revenue or by borrowing) at a cheaper cost.
- The government / public agency concerned will continue to retain accountability for the provision of the service to the public at a reasonable cost.
- The contracts / concessions granted are usually for a long term and thereby alienate the statutory right involved for a very long period.
- The transfer of the public assets to the private body for the duration of the contract requires audit involvement.
The most important factor that would weigh with the SAI to conduct the audit of PPP projects is to ensure the value for money aspects of such transactions. The main purpose of the audit, and based on which the scope could be defined, would thus be to provide a reasonable assurance to all stakeholders including the government, parliament / legislatures, and the public that the PPP arrangement subjected to the audit has yielded value for money and that public interests have been adequately protected.
In order to reach valid audit conclusions on the PPP arrangements, therefore, the auditor should have a sufficiently wide and detailed jurisdiction covering all aspects of the transaction, beginning from the formulation of the proposal to the final end results.
The specialised role that CAG is playing in ensuring good governance is quite evident from some the bold steps taken by the organisation in publishing and bring in public notice the scam of Common Wealth Games2010 and 2G Scam. Even the Supreme Court of India supported the autonomous and unbiased role by ensuring go ahead for the publication of CAG report on the misappropriations in the fund of the Common Wealth Games in spite of the pressure from ruling party and some ministers. Such steps ensure the transparency and the accountability of the government and the public body to the people of the nation. The CAG audit of public accounts also ensures that the hard earned people’s money is well utilized for the development of the national economy and the welfare of the people of India. I do think that our national administration has inbuilt mechanism to combat the corruption in public offices and public welfare spending. Being a civil service aspirant and having special interest in public administration and Indian Economy helped me a lot in appraising the role of the CAG in the light of the of duties and powers of the Comptroller and Auditor General of India are laid down in the Articles 149—151 of the Constitution of India and the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, L971 (56 of 1971) and amendment Act, 1976 (58 of 1976).
This a technical essay but personal views are expressed wherever I felt some need of sharing personal experiences of the role of the supreme audit authority of India which is by no doubt has emerged as one of the best and successful authority and organisation working for the constant and progressive development of the nation like UPSC and Indian Armed Forces.
I do foresee that the CAG will also devise ways for the changing pattern of accounting practices like accrual based accounting and the emergence of scale ventures of public private partnership in the field of infrastructure development and social services delivery systems and mechanism has necessitated auditing of their account for ensuring accountability and transparency which are key feature of a good governance.
Shashikant Nishant Sharma