The Hindu Business Line : The indispensable audit

PUBLIC enterprises were set up as part of country's development planning process. Frequently, demand is made to do away with the Comptroller and Auditor General's (CAG's) audit of these enterprises on the ground that it hinders decision-making and risk-taking on their part.

The latest such move has come from the Irani Committee, set up by Department of Company Affairs to suggest changes in company law. While the Committee went beyond its terms of reference and made suggestions without wider consultations, the Government it seems is giving serious consideration to its recommendation.

The issue of audit of public sector undertakings (PSUs) by the CAG was settled by Parliament in the 1950s, when government companies were being set up for the first time for carrying on commercial and industrial activities.

The then CAG, V. Narhari Rao, pointed out that it would be unconstitutional if the CAG does not have authority to audit them. Supporting him, the Public Accounts Committee observed, "The CAG should have unquestioned right to audit the expenditure of these concerns, because they are financed from the Consolidated Fund."

A solution was found by inserting a provision in the Companies Act of 1956, which stipulated that the CAG will have a right to conduct supplementary audit of a government company (defined as one where government shareholding is 51 per cent or more) and the statutory auditor of the company will be appointed on his recommendation and he can issue directions to them.

Recognising the special character of public enterprises, a committee of the Congress party in Parliament headed by V. K. Krishna Menon (1959) recommended a separate committee.

Based on its recommendations, Parliament constituted a Committee on Public Undertakings (1964), "to examine in the context of autonomy and efficiency of the public undertakings whether their affairs are being managed in accordance with sound business principles and prudent commercial practices". The CAG's reports, after they are submitted to Parliament, are remitted to the aforesaid committee.

The role of the CAG in the context of autonomy of PSUs is often debated. During the last three decades, several high-level government committees, such as the Administrative Reforms Commission, the L. K. Jha Committee and the Arjun Sen Gupta Committee, have studied this in depth. They have all come to the conclusion that the requirement of parliamentary accountability demands that public enterprises should remain within the ambit of the CAG's audit.

However, they have suggested that the CAG should adapt his audit style suitable for a business entity.

It needs to be appreciated that the CAG's audit of balance-sheet is largely responsible for maintaining transparency in the accounts of PSUs, which can be said to represent the `true and fair state of affairs of the company'. The same cannot be said about the private corporate sector, where there are numerous instances of accounts being manipulated, often with the connivance of their auditors. These companies suddenly go bust, causing immense suffering to their shareholders and loss to financial institutions which fund them.

The unexpected collapse of Enron, WorldCom and a large number of companies around the world has shown that corporate greed is a universal phenomenon and an effective check on them is necessary. Australian professors Clarke-Dean-Oliver observed thus: "Corporate accounting does not do violence to the truth occasionally and trivially, but comprehensively, systematically, and universally, annually and perennially."

The CAG also conducts performance audit, whether operations are conducted with due regard to economy, efficiency and effectiveness. Statutory auditors do not have mandate to do performance audit. Every year, audit reports bring out numerous cases of loss, waste and nugatory expenditure.

Two instances from the latest 2005 audit report are illustrative. ONGC has incurred losses running into several thousand crores owing to the one sided joint venture agreement with the Enron-Reliance consortium for exploration of the Panna Mukta and Tapti Ravva oilfields. The execution of the Golden Quadrilateral project by the National Highway Authority shows severe managerial deficiencies, resulting in huge slippage in road construction work as well as heavy loss to the exchequer.

Audit helps in exposing cases of fraud, which would otherwise never come to light — the infamous Kuo Oil deal entered into by IOC with a nonexistent firm in Hong Kong is a case in point.

PSU managers often feel irked when audit examines individual transactions and points out lapses by taking the benefit of hindsight.

Keeping these considerations in view, an Audit Board was constituted with technical experts as members, to provide commercial type audit.

But things have not improved, as the office of the CAG has not changed its audit methodology and a large part of its staff lack the technical competence to do high quality investigation.

It is time it changed its style of functioning, developed professionalism and looked at the special requirement of PSUs, which face tough challenges while operating in a highly competitive global environment.

While admittedly there is considerable scope for improving the working of the office of the CAG, there is no case of doing away with audit. In advanced democratic countries such as France, Italy, the US, Germany and Japan, government-owned enterprises fall within the jurisdiction of its Supreme Audit Institutions. CAG helps make operations of government institutions transparent and accountable, and is an instrument of Parliament for enforcing accountability of the Executive, a sine qua non for any democratic polity.

(The author is a former Deputy Comptroller and Auditor General.)

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