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Opinion - Auditing


Audit of govt companies: Is CAG extending its powers?

H. Natarajan

ONE of the few authorities which raises a sense of apprehension in the minds of government officials is the Comptroller and Auditor General of India (CAG). The CAG is empowered to appoint auditors, and direct the professional auditor on the conduct of the audit. The CAG is also entitled to conduct a supplementary audit of government companies and comment upon or supplement the report of the professional auditors. The Auditors' Report and the CAG's supplement are required to be placed before the annual general meeting of the company.

The CAG, as a matter of course, has also been subjecting government companies to scrutiny in many other forms. Some examples of such additional scrutiny conducted by him are:

  • The so-called efficiency and propriety audit.

  • "Inspection" of the accounts of government companies as a part of the "Commercial Audit" function. The results of such inspections are found in the Audit Report (Commercial) of the Central or the respective States.

  • Periodic reviews of selected government companies for different blocks of years at a time.

  • Sectoral studies on companies belonging to different sectors, focussing on such areas as fund management, inventory management and so on.

    The question that arises is: Does the statute confer the authority and power on the CAG to carry out these exercises? Or has the CAG arrogated to itself the functions and clothed itself with powers that strictly do not have legal sanction?

    To answer the above question, it is necessary to examine the provisions of both the DPC Act, and the Companies Act. Section 19 of the DPC Act specifies the powers of the CAG in respect of government companies. According to Sub-section (1) of that section, the duties and powers of the CAG in relation to the audit of the accounts of government companies shall be performed and exercised by him in accordance with the provisions of the Companies Act, 1956 (1 of 1956).

    The import of the above provision is that the CAG's powers in government companies are defined and circumscribed by the provisions of the Companies Act, 1956. In other words, the CAG can exercise his powers only to the extent mandated by the Companies Act. He is not expected, or indeed permitted to go beyond the powers bestowed on him by the Companies Act.

    Let us examine what powers are conferred on the CAG by the Companies Act, 1956. Section 619 of the Companies Act, 1956 contains provisions relating to the powers of CAG in respect of audit.

  • Sub-section (1) provides that in respect of a government company, the provisions of that section overrides the general provisions relating to audit contained in Section 224 to 233 of the Act.

  • By virtue of Section 619(2), the auditor of a government company is appointed by the CAG.

  • Section 619 (3), inter alia, empowers the CAG to: a) Direct the manner in which the auditor should conduct the audit; and

    b) Conduct supplementary or test audit of the company's accounts, and require information or additional information for the purposes of such audit.

  • Section 619(4) confers the right on the CAG to comment upon, or supplement the audit report in such manner as he may think fit.

  • Section 619(5) requires that such comments upon, or supplement to the audit report shall be placed before the annual general meeting of the company at the same time and in the same manner as the audit report.

    The above provisions make it clear that the role envisaged for the CAG by the statute is supervisory rather than primary. The primary function of audit is left to the professional auditor (a chartered accountant), who is appointed by the CAG under Section 619(2). To enable the CAG discharge its supervisory role, the Act empowers it to give directions as to the manner in which the auditor should conduct his audit. The CAG is also empowered to comment on and supplement the auditor's report if warranted. For this, Section 619(3)(b) confers on the CAG the power to conduct a supplementary or test audit, and seek additional information.

    Supplement transcending the main

    By definition, a "supplement" is an addition or an appendage to the "main". A supplement cannot assume a separate identity, independent of the main. A harmonious reading of Section 619 will show that the intention of the statute is clear. The audit report, and the supplement go together, and not separately. The destination of any audit report, and the supplement arising out of the supplementary audit is the annual general meeting. The Companies Act does not envisage any report arising out of the audit of the accounts to any agency other than the members at the annual general meeting. However, the scope of supplementary audit appears to have been expanded far beyond what is mandated by the statute.

    According to the CAG's Commercial Audit Manual, the supplementary and test audits conducted by the CAG is an efficiency-cum-propriety audit. In exercise of the powers under Section 619(3)(b), the CAG undertakes various exercises calling them "inspections", "reviews", "pilot studies", "sectoral studies" and so on. The reports from such exercises do not form a supplement to the audit report as envisaged under Section 619 (5), but in other documents.

    One common document in which the CAG's comments arising out of such "inspection" finds place is the commercial audit report of the various government departments. This report is meant to contain the comments of the CAG on the commercial activities, if any, of the government departments. But a perusal of any commercial audit report would show that it also has the CAG's comments on the accounts of not just the department, but also the government companies under the administrative control of such department. Government companies are treated as synonymous to, or extensions of the departments concerned, and the working equated to the working of the departments. This goes against the basic principle of the corporate structure.

    In fact and in law, a company incorporated under the Companies Act is a distinct entity, separate from its owner. That the government happens to be the owner does not negate this fundamental principle. While conducting the audit of the government, by whatever name called, the scope of the CAG scrutiny can at best extend to the investment decision of the government in the share capital of or loan to the company. The working of the company itself does not come under purview of CAG scrutiny, as part of the audit of the government accounts.

    Section 19 of the DPC Act clearly mandates that the CAG shall perform his powers and duties in accordance with the provisions of the Companies Act, 1956. The Companies Act does not provide for any report by CAG to be furnished to any agency other than the annual general meeting. Hence, it is clear that the so-called commercial audit reports commenting on the accounts of government companies do not have the sanction of law.

    Audit ad infinitum?

    It is an established principle in corporate law that the exercise relating to audit for a particular year ends with the placing of the accounts before the annual general meeting. Once the accounts for any year are compiled, audited, and placed before the annual general meeting, there is no scope in the Companies Act for re-opening of the accounts of that particular year for audit. Such reopening is permitted only in exceptional circumstances. Instances of such provision are Section 233A of the Companies Act empowering the Central Government to direct a Special Audit, and investigation conducted under Section 235 or 237. These provisions are meant to take care of unusual circumstances warranting suspicions of mismanagement. Else, there are no provisions in the Companies Act, permitting re-opening of accounts for audit. But often the CAG conducts periodic "reviews" of operations of government companies for blocks of years. This has the effect of reopening the accounts in respect of previous years already placed before the annual general meeting. This too does not have the sanction of the statute.

    Re-look needed

    Till recently, all government companies were wholly owned by the Centre or States. No government or government company chose or dared to examine whether or not the statute really confers unlimited rights on the CAG for scrutiny of the accounts of government companies. Since the CAG is a constitutional authority, any information sought by it was routinely provided. The end-use of the findings of the audit was also never questioned, given that such questioning could lead to accusations of lack of transparency.

    Given this scenario of least resistance, has the institution of the CAG then, been extending its sphere of power even beyond what is envisaged by the statute? In an era of disinvestment and joint ventures, private entities are increasingly becoming shareholders and part-owners of government companies.

    They are, thus, entitled to examine the scope and extent of powers of the CAG conferred by the law. After all, even a constitutional authority cannot be permitted to overstep its powers in the name of transparency and public interest.

    (The author is a practising company secretary.)

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