The third agency that performs control over the financial administration, but is independent of the both i. e. Legislature and the Executive, is provided in almost all the financial administration systems across the world. This third agency is the agency that performs audit. Audit is one of the most important instruments of control over the finances of the country. It is a means of enforcing accountability and is a part of the external control over the administration. Audit, in simple words, means the examination of accounts with a view to determining their correctness.
Audit is a quasi-judicial function as compared to accounting which is an executive function. Under the audit, the accounts are checked from the point of view of –
- legal availability of the money that has been spent;
- ascertaining whether the money that has been spent on the activity for which it has been sanctioned by the Legislature;
- ascertaining whether it was disbursed to the right authority;
- ascertaining whether all the rules and regulations of financial administration were observed or not; and lastly
- to ascertain whether due economy, wisdom and faithfulness while spending the money was observed or not.
Audit as a system of control over public finances first came into being in England and it was more the result of a gradual progress than a creation. The audit system was established in England under the Exchequer and Audit Department Act of 1866. This Act inter alia provided for the establishment of the office of the Comptroller and Auditor General. Formerly, audit was conducted only in the case of expenditure and that too it was done only to ensure that money had been spent in accordance with the appropriation grants. The present audit goes a step further also i. e. to examine the faithfulness, wisdom and economy applied by the officials in making the expenditure.
Audit in India
Audit of the Government accounts in India is a Union subject. The salient features of Indian Audit System are as follows :
- Indian audit is governed not by law but by an executive order i. e. the Government of India Audit and Accounts Order 1936 as adopted under the Indian (Provisional Constitution) Order of 1947. In Britain, there is a statutory provision for the audit (Exchequer and Audit Act 1921), and so also in the USA it is done under the Budget and Accounting Act 1921.
- Audit in India is mostly limited to the expenditure side only.
- Indian audit is primarily a legality audit and it does not usually go into the question of merits of expenditure. However, it can investigate or comment upon the impropriety, wastefulness or extravagance of expenditure wherever it finds a prima-facie case for doing it.
- Indian audit is conducted on behalf of the executive who causes it to be laid before the Public Accounts Committee of the Legislature.
- In India, although largely the British Model is followed in administration, the office of C&AG is organised a bit differently. In England the C&AG is not concerned with the accounts but deals only with the Audit. In India, however, a combination of Accounting and Auditing functions is to be found and both the functions have been organised under one and the same service called Indian Audit and Accounts Service. At the same time, C&AG has now been diverted of most of his comptroller functions.
- Unitary features of Audit and Accounts functions have been dominant in India i. e. there are no separate Audit and Accounts services for the Union Government and the State Governments, as they are generally to be found in a country having federal set up. Here C&AG exercises control over public finances not only of the Union Government but also of the State Governments. He is, however, assisted in his function by the Accountant General sin the States.
Functions of CAG in India
Comptroller and Auditor General in India is basically now an auditor, since the Comptroller functions have been almost taken away from him nowadays. His role is of advisory nature vis-a-vis the legislature and its Committee on Public Accounts. The Audit Report given by C&AG cannot be discussed directly in the Parliament. Instead it is first presented to the Public Accounts Committee (PAC) which discusses it and then gives its report which in turn is discussed in the Parliament. This arrangement has been made to safeguard the independent status of the C&AG. There is a possibility that while discussing the Audit Report in the Parliament, a few remarks of a personal nature could be made which would have an adverse effect on the independence of the C&AG in case a direct discussion of his reports are allowed in the legislature. The office of the C&AG performs audit on all the accounts where Public Money is involved i. e. C&AG does the audit of accounts of all the States, all the Central Government departments etc. He also performs audit on the organisations which are substantially financed by the Central Government (i. e. grants exceeding 50% of the total expenditure of the organisation). Similarly if the money under the grant exceeds 5 crores (which may be less than 50% of the expenditure), then also the audit of that organisation is conducted by C&AG. Audit of the Public Sector Undertakings is conducted by commercial auditors; but the panel of such auditors needs to be approved by the C&AG. In addition to all this, the office of C&AG also prescribes the format of accounts for the states to maintain uniformity in the accounts of all the states and to enable the taking up of the consequent process of audit.
Issue : Separation of Accounting and Auditing
The system of combination of Accounts with Auditing has both its advantages and disadvantages. There is a strong case for separating the two functions. Firstly, the nature of the two functions is entirely different i. e. accounting is an executive function while auditing is a quasi-judicial function, where the one who is performing the audit is required to sit in judgement over the expenditure as a judge. Hence the combination of the two functions is against the principles of natural justice, where one should not be a judge in his own case. The person keeping the accounts can hence very easily certify the accounts as correct and legal by overlooking the errors in accounting or the impropriety of expenditure. Thirdly, since C&AG has to maintain a large number of accounts in his office on which he has to perform audit later on under this system, he is highly overburdened. Lastly, in the early period of administrative history, the departments of the Government were unable to maintain their own accounts properly and hence there used to arise very frequently. The problem of budget overshoot. This problem of budget overshoot necessitated the keeping of accounts in the individual departments alongwith the provision of an internal auditor who would exercise a control over the expenditure and prevent budget overshoot. Now with the advent of modern technology, when the correctness of the expenditure can be easily cross-checked through the use of computers, electronic data processing etc., the accounting needs to be separated from auditing and the office of C&AG needs to be made responsible for audit only.
However, the combination of the two functions and the consequent centralisation too has an equally strong a case. Firstly, if a separation of accounting and auditing is attempted, the problems of co-operation and co-ordination would result and alongwith it, short term shortage of manpower would arise, since 2 sets of personnel would be required to do each function separately. This short term shortage of personnel may last long in a developing country like India, where skilled personnel are not so easily found. Secondly, since partial auditing of the accounts can be done right at the time of preparation of accounts, the job of auditor gets easier. This system also prevents instances of budget overshoot from taking place. Moreover, the separation of accounting and auditing functions when attempted in the Defence and Railways department of the government, did not yield a healthy experience. Lastly the Government points out that the combining of the two functions under a Central service results in uniformity of accounts throughout the vast country, which consequently facilitates in ascertaining the fairness and purity of accounts. This also results in higher morale of the personnel, as they belong to a Central Service and they being under an independent constitutional office, enjoy sufficient freedom from the control of the executive. Moreover, in India, the combination of Comptroller and Auditor function exists only at the apex level of CAG while at the lower level separation already exists, where the Accountant General exists for each of the States preparing their accounts while audit is performed by CAG. The centralisation of the accounting and auditing is also compatible with the federal scheme of polity with strong centre and weak states and hence the control of CAG over the State finance is according to the scheme of overall arrangement of administration prevailing in India. At the same time, the major part of the financial resources of the States comes from the Central Government in the form of Grants-in-aid, centrally sponsored schemes loans etc. Hence, when the money of the Union Government is involved, it is perfectly all right, if the C&AG audits their accounts.
However, there is an urgent need to re-think in this area. Currently the administration in India is undergoing a significant change with the introduction of Panchayati Raj Institutions and Urban Local Bodies (i. e. Municipalities and Nagar Palikas) as the third tier of governance in the earlier two tier federal set up that was prevailing. The overall aim of the administrators in the country is to create additional layers of administration where each layer is linked organically to the one that lies just above it. Hence from the financial point of view, a separate Comptroller and Auditor General for each of the States is desirable, who should play the same role as that of the current CAG at the Union level vis-a-vis the Panchayati Raj Institutions (PRIs) and the Urban Local bodies i. e. the State level CAG should have an overall control over the finance of the States as well as that of the PRIs. There should, however, be one chief CAG at the Union level who should act as the co-ordinator vis-a-vis all the State CAGs for the purpose of providing uniformity in accounting and auditing as well as keeping an overall steering control over them. The immediate reason for having such an arrangement i. e. that with the 73rd and 74th Constitutional Amendment Acts, the PRIs and the Urban Local Bodies will be drawing some of the financial powers directly from the Constitution. Hence in the absence of any financial control at the State level, these bodies would tend to become islands of autonomy within the State boundaries. Hence to curb such dangerous tendencies, it is necessary to have a control of State over the finances of these bodies.
Critical Appraisal of Audit in India
Auditors in India, have been criticised of being guilty of being unable to control the wasteful expenditure. The chief reason for their failure is in the post-mortem nature of the audit and the fact that they are highly overburdened. Hence they restrict themselves to checking primarily the legality of the expenditure and hence the executive can get away with wasteful expenditure, if he maintains proper documental support for the expenditure. Hence the question arises whether the auditors should go into the intent behind the decision taken by the executive. Decision-makers oppose this view that auditors should go behind the intent also on the grounds that decision-making forms an important activity of an executive and even bonafide decisions of an executive can be interpreted differently under extreme circumstances. This leaves an important tool in the hands of the auditors to settle personal scores or to blackmail the executives. Hence audit, according to them, should not question the intent behind the decisions made by the executive; instead it should check only the authenticity of the financial transactions only. However, if the intent behind a particular decision is not questioned, the faithfulness and wisdom in making the expenditure cannot be checked. Without undertaking this exercise due economy in expenditure cannot be ensured, as the regularity of the financial transactions can be fabricated to fox the auditors. It is essential from the point of view of good administration that auditors need to apply their mind beyond the regular audit to check for corrupt practices in administration. By checking for the corrupt practices in financial administration alone, C&AG can claim to be the real guardian of the public purse. Finally, the Constitution of India places the onerous responsibility on him to ensure that an efficient system of financial administration prevails in the country. Hence there is nothing wrong if he tries to check for the corrupt practices.
However, vesting the auditor with the power to go into the intent behind decision may lead to disastrous results at times. For example, in the case of Bofors gun deal (155 mm Hawitzer Guns; Mfd by Swedish Company – Bofors), the then C&AG of India used the issue for his personal gains. His task of exposing the impropriety of the Government in the deal can be interpreted as a politically motivated move due to two facts –
- The impropriety of the Government in the Gun deal was made public in his report right on the eve of the elections which gave a handle to the opposition to frame corruption charges against the Government and then exploit it successfully too.
- Later on, he resigned from the service and joined politics and contested elections on the ticket of the Janata Dal.
Hence such misuse of the Constitutional position for personal gains has the danger of vitiating the entire political atmosphere of the country and thus substantiates the apprehensions of the executives as stated above. Though legally, there is no provision that forbids the auditor from checking the intent behind the decision of the executive, it is morally questionable since it may ultimately lead to politicisation of the audit machinery.
There are some other problems associated with the office of the C&AG. There has been a complaint from the personnel belonging to the Indian Audit and Accounts Service (IAAS) that the Office of C&AG is dominated by the personnel belonging to the IAS. The domination by IAS personnel is questionable from the point of view that it limits the career growth opportunities for IAAS personnel. Secondly it is against the policy of the Government, where it wants to employ more and more specialists in administration, while the personnel belonging to the IAS are only generalists. Secondly, it is being felt that the scope of the audit by the C&AG is being reduced day by day using various executive orders. For example, the public sector banks and financial institutions have been taken out of the purview of audit to hide instances of financial mal-administration. The need is hence to have to check on such executive orders that are meant to dilute the control of public over the expenditure.