Audit pill for many ills of democratic governance

Democratic Government is:

Government by the People, for the People and of the People -Abraham Lincoln[1]

In democratic government, representative elected by the common people has the duty to ensure proper management of resources and good governance in the country with the aim of maximum welfare of common masses. Good Governance as a concept is applicable on every sector of democratic world but one element which is very important for good governance is finance/economy that is needed for development and proper administration of the Country. This important element always needs to operate in an ethical, accountable and appropriately regulated environment. Today, from governance perspective, strong treasury is considered necessary to provide good governance. In India, where at the present time, everyday new scandals, and misuse of funds from sanctioned projects along with fake billing are coming out; regulation of financial reserves has become inseparable part of the governance of the whole country and to inculcate the ideal features in the government for financial regulation, administrative system needs to be improved and for improvement in administrative system, Institutions like Comptroller and Auditor General (“CAG”), which is Supreme Audit Institute of India has a major role to play and to play an important role, this institution need to be empowered and effective. In a democratic country where elected representatives start losing faith of people there importance of Audit in governance becomes immeasurable. The term governance in literal sense defined as In literal sense,

Governance is defined as “Act, manner, fact or function of governing, sway or control”^[2]and characterized as a course of decision making and the practice by which decisions are implemented. It is also defined as exercise of power or authority – political, economic, administrative or otherwise – to manage a country’s resources and affairs.

Good Governance is defined as “An ideal manner which is essentially free of abuse and corruption and works with due regard to law”^[3]and characterized by many important features. According to Kiyaga-Nsubuga[4], ‘Good governance’ requires some definite features which entails efficient and effective use of power and resources, constitutionalism and rule of law, justice and equity, electoral and participatory democracy, security of person and property, promotion of human rights, transparency and accountability (political, managerial and financial), exemplary and inspirational leadership, and popular participation in social and economic processes. Its facilitating conditions include a strong state, a robust and dynamic economy, vibrant civil society and informed and empowered citizenry.[5]

These above mentioned features of good governance are big challenges in a democratic country and are very hard to achieve and for its achievement, Audit has an important role to play.

The following diagrammatic presentation provides features/challenges of good governance with which Audit has to deal with.

Audit institution as an important part of the administrative system, with a responsibility for audit in public sector, has a potential to provide first step of ladder to reach at the height and to meet all challenges/problems of good governance in the democratic India as presented above.

The importance of Audit Institution in facilitating challenges of governance in detail is discussed in the following as:

Importance of Supreme Audit Institution (SAI) in Democratic Governance

Audit ensures not only transparency in the system but also the effective monitoring of the fiscal responsibility of one arm of government to another and to facilitate all possible modes of combating challenges of governance. The etymology dictionary explains that the term ‘audit’ as “to hear” and the same is originated from the Latin word audire.[6] Audire in Ancient Rome referred to the “hearing of accounts,” a process in which one official compared his records with those of another official. In today’s scenario, Audit has become one of the most important administrative tools whose importance in the words of Dr. B.R. Ambedkar is as[7]:  

“CAG is the most important officer in the Constitution of India. He is one man who is going to see that the expenses voted by the Parliament are not exceeded or varies from what has been laid down by the Parliament.”

Even the Hon’ble Prime Minister Manmohan Singh believes that CAG is an important and reliable watchdog in our democracy and has a duty to sift the wheat from chaff and to distinguish between wrong-doing and genuine efforts and to appreciate the context and circumstances of decisions.[8]

To understand the role of Audit Institution/CAG in democracy, we need to understand the existing type, procedure and steps of work carried by it.

Type of Work

In India, although the Ancient and Medieval administrations established a rational accountant audit organizations but it was the British who introduced a proper system of accounting and auditing with the establishment of office of Comptroller and Auditor General (CAG). Even today, CAG is a Constitutional authority[9] who is responsible for auditing all receipts and expenditure of the Government of India and the state governments, including those of bodies and authorities substantially financed by the government. This Institution is also the external auditor of government-owned companies. A brief note on development of audit institution is as below:

Development of Audit Institution

Setting up in the year 1860 with the introduction of a system of annual budget of imperial income and expenditure;

1884, first time use of the term Comptroller and Auditor General;

1919, CAG become Independent;

1935, Appointment of Provisional Auditor General was made;

After Independence, it became Constitutional Authority

The present composition of CAG office is:

In India, as I discussed earlier, Indian citizens entrust their elected representatives to manage nation’s resources who in turn entrust the same to the executive body. To utilize nation resources properly, the responsibility lies on CAG who is basically responsible for auditing and the reports prepared by Audit Institution are taken into consideration by the Public Accounts Committees (PACs), which are special committees in the Parliament of India and the State legislatures. CAG is also a head of Indian Audit and Accountant Service and according to Article 151[10] it submits audit report to the president or governor who causes the same before Parliament or State legislatures respectively.

Procedure of Work

The Audit Report prepared by the CAG is in proper format and popularly known as ‘Inspection Report’ which consists of following two parts:

a. Regulatory Audit

b. Performa Audit

First part ascertains whether the money spent on government program is approved one and expenditure incurred is in conformity of laws, rules and regulations framed for spending public money. In exercising oversight functioning, it evaluates whether government entities are doing what they are supposed to do, spending funds for the intended purpose, and complying with laws and regulations.

Second part shows whether amount spent upon Government programmes have achieved the desired objectives at lowest cost and has given the intended benefits. This part is used to ensure that policy is implemented as intended, strategies are met, and the overall performance of the government meets expectations and needs within policy laws and regulations.

CAG also has power to do Audit of certain important institutions which are listed as below:

Audit of Revenue which includes audit of tax assessment such as Income tax, Central Excise and Customs, Sales tax etc.,

Commercial Enterprises or Public Sector Undertakings which includes Audit of government companies for which Companies Act, 1956 provides suitable provision. Under Section 619 of the Companies Act, 1956[11], the auditor (statutory auditor) of a government company including deemed Government Company appointed by the CAG conducts the audit of accounts of the companies. On the basis of supplementary audit conducted thereafter, the CAG issues comments upon or supplements the Audit Report of the statutory auditor.

Autonomous Bodies which includes IIMs or other educational or development organizations,

It has power for to Audit Statutory Corporations also.

Recently, it has also started Social Audit as well which was a demand from very long time. This type of Audit is nothing but understanding, measuring, reporting, and most importantly improving the efficiency and effectiveness of the local governance.[12] In lay language, India being a welfare state, several programs and policies are implemented for the benefit of people. Politicians and executives are usually the ones who control and implement these policies.  Some policies are common to all and some are special that are meant to benefit the weaker sections of the society.  To implement all such policies, funds are drawn from the state exchequer. The social control over withdrawal and usage of this fund is called Social Audit.[13]

Social Audit has fulfilled Missing Link in the previous system. The presentation on the same is as below:

Source: http://hanumant.com/SocialAudit.html

During the last five years, Major programmes like: National Rural Employment Guarantee Scheme, National Rural Health Mission, Sarva Shiksha Abhiyan, Midâ€day Meals Scheme, Accelerated Rural Water Supply Programme, and Pradhan Mantri Gram Sadak Yojana etc. has been covered under the ambit of Social Audit. Even for many other social welfare schemes social audit has been conducted.

After Social Audit, in the time when we are talking about sustainable development, it is very important to know about role of CAG in that. CAG is doing environmental audit within the broad framework of Compliance and Performance Audit. This Audit is a part of CAG from the last 25 years.[14] It conducted audits with regard to Air Issue, Water Issue, Waste, Biodiversity and Environmental Management System.   

Even, with the increasing use of technology, CAG has started Audit of Information Technology (IT Audit) also. It has carried out around 250 IT Audits till now and pointed out not just deficiencies in the software but overall service delivery issues in IT enabled systems.

The significant findings in the Audit Reports represent significant inputs to good governance that can lead government to take prompt and appropriate corrective actions to remedy identified weakness and deficiencies. The IT Audit initiative of SAI India has been awarded with Prime Minister’s Award for excellence in public administration in the year 2008.[15]

In light of above working, the role of CAG/ Audit in democratic India carries a very significant position which is elaborated as below:

Audit in Good Governance Challenges

The Specific Objective of Auditing is to see the proper and effective use of public funds; the development of strong financial management; the proper, orderly and timely execution of administrative activities and most importantly, the communication of information to public authorities and to the common public through publication of reports. While fulfilling these objectives, Audit Institution has the ability to ensure good Governance in a democratic country where elected representative of the Country runs the government. A simple example of benefit of Audit in any type of Governance including democratic one is ‘Steel Authority of India Limited’. This company on the suggestion of Audit Committee planned a special study on safety management and major raw material stock accounting.[16] This study is considered as a landmark step in the governance of the company. A detailed discussion on the importance and role of Audit and Audit Institution with regard to democratic India is discussed as below;

CAG in Combating Corruption

The Root Cause of Poor Governance lies in Corruption. - N. Vittal[17]

Today, Corruption in the form of cancer has become one of the most important challenges to deal with.  In governance with its vertical and horizontal flows, it is disturbing and spoiling the total atmosphere within the country. India’s ranking of 87 among 178 nations by Transparency International Survey, 2010 indicates the extent of corruption problem in India.[18] Moreover, the recent Anti- Corruption moments led by Anna Hazare with the support of thousand of peoples has shown Indian civilians anger and frustration from this problem. To kill this disease, CAG can act as an important pill.

CAG as such is not primarily designed as anti-corruption institutions but it is playing a main role in combating corruption by influencing the approaches used to combat corruption and promoting a culture of integrity. The main contribution of CAG to the fight against corruption is the improvement of overall transparency and accountability to limit the opportunity for acts of corruption.

It basically focuses on dissuasion and prevention rather than detection.[19]

The audit reports prepared by CAG contain a brief narration of cases involving financial irregularities, losses, frauds, wasteful expenditure and saving etc. The reports on 2G scam, CWG scam, Mizoram scam has revealed the role which CAG can play in highlighting corrupt and corruption in the governance. The timely and proper action by appropriate authority on CAG report will produce a deterrent effect on others which is definitely a move towards the path of real democracy and better governance.

Except Corruption, CAG by performing insight and foresight functioning as discussed above helps in promoting good governance in the country. CAG promotes all necessary features of good governance as discussed above. It encourages: 

a. The transparency and disclosure of public financial information.

b.  Improvement of external scrutiny of public finances.

c. An educational and preventive effect, as ministries and departments and other statutory bodies know that their accounts could be audited at any time.

d. The demand for greater accountability in the management of public resources.

The discussion on its benefit in detail is as below:

Accountability

Without Audit no Accountability, without Accountability no Control, and if there is no Control, no question of any Governance

The above statement indicates the importance of Audit in fulfilling very first purpose of democracy. This statement also shows the importance of SAI of any Country because Audit of government departments is a responsibility of this particular institution. Even scholars have argued that auditing has contributed, is contributing and will always contribute in promotion of implementation of accountability in using public money and providing services to the public.[20]

Accountability which is a concept of ethics and used synonymously with concepts such as responsibility and other terms associated with the expectation of account-giving is very important in the democratic country because here, public expects that those responsible for handling public money should be held fully accountable for the use of that money and this is only possible through effective Audit Institution because it acts as an important key to enable and maintain government’s accountability as it supply the information needed by the legislature and the public to hold governments accountable. As such, it is fundamental institutions of accountability.[21] In India, CAG as architecture of financial accountability deals the accountability aspect in Regulatory Audit[22] (first part) of its inspection report but its dealing failed to provide effective results/check on inaction of Executives. The reasons of which will be discussed in the later part under the heading Audit in Governance and Stumbling Block.

Transparency

Today, people expect that resources approved by their representatives must have been utilized for the purposes intended and they want to understand how government departments are performing their duties and whether the performances of these departments are being improved. To answer these expectations, audit report has its own importance. As a very cost-effective means of promoting transparency and openness in government operations, Audit report on the reasonableness and fairness of the accounts assures nation about the proper use of resources. In case of any misuse, it highlights the same as well. But, here the problem is with regard to limited or no legal power no power which is discussed in detail in the later part.

Informed Citizenry

In a democracy where government is by the people; people’s knowledge about government policies, its implementation and financial spending on it, is utmost important. This work is also a duty of Audit Institution. Audit reports aware aam admi about the ongoing governmental schemes and programmes along with the money spent upon them. It highlights the pit and fall in the implementation of the government programs which aware citizens about the loo-poles in the execution and governance of particular policy. The recent 2G scam report, CWG report by CAG are considered important to inform common man about the extent of wrongdoing in the existing governance of the Country.  But here, it is also important to mention that relationship of media with the Audit Institution is utmost important to spread the awareness about any matter and to properly inform citizens.

Effectiveness, Efficiency and Participation

The audit reports are prepared in a highly inter-active, participatory and transparent manner with full involvement of the executive at all levels including the Secretary to the Government.[23]

The above statement indicates participatory routine followed in preparation of reports and without any doubt, it can be said that Audits can contribute to improving government performance through not only identifying faults but also acting as a deterrent for abuse of power by providing valuable information about government actions to the public. Performa Audit (Second Part) of Inspection Report offers financial criticism which is a helpful tool in informing the executive about the economy, efficiency and effectiveness with which projects have been executed and also provide Government the opportunity to improve and work upon its performance. Moreover, in line of political demands for greater accountability in providing better services to public and efficiency in managing public sector auditing become a necessity which also provides for feedback to the government to adjust policies and also shares best practices information regarding public policies. In every report, it dealt with a fair description of problems and weaknesses in any public policy/department/budget, their impact and combines the same with useful recommendations. Their recommendations (to the extent that they are implemented) contribute to savings or more efficient use of funds in individual areas and so increase the effectiveness of the public budget. ‘Indian Oil Corporation Limited’ is one of the beneficial of Auditing. The Audit of the company significantly contributed in reviewing of idle assets, monitoring the award of work on nomination/single tender basis, implementation of new technical system. In this way, Audit saved the company from wastage of resources and recommended steps for better utilization of them.[24]  

Illustrations regarding Effective Role of Audit

Change according to the Demand of time

In the Mechanical Era, use of technology is also an indication of progress. In this field also, CAG is playing an important role. From the year 1998, CAG is actively working for computerized compilation of accounts and also assisted and guided the state treasuries in computerizing their work so that over-drawls of amount can be immediately detected and alert messages are generated with immediate effect.[25]

Active in Security of Country

In the light of security issue and heightened internal security threats, check on fake passport has become necessity for Indian Government. CAG is one of the institutions who worked for reviewing the visa Passport and consular services and had pointed out instances of weak internal controls, passports because of which passports on fake identities were issued by Indian Passport offices.[26]

Change in Regulations

Indian Railways handed over pantry cars to IRCTC without making any provision regarding realization of transport cost of pantry cars. Based on the audit recommendation, a clause on this has been incorporated in the Memorandum of Understanding.

Advisory Role

It advises government institutions on many aspects. The important one are:

a. Regarding strengthening internal controls and understanding risks to improve delivery systems;

b. To put in place better, transparent accounting systems for Local Bodies and Panchyati Raj Institutions etc.

International face of Democratic India

Audit Institution of India is playing very active role in the international arena as well. It is one of the most important international face of democratic India. It is a member of UN panel of external auditors and of the Governing Board of the International Organisation of Supreme Audit Institutions (INTOSAI)[27];

It is an external auditor for many UN bodies like World Health Organization, World Trade Organization etc.

It also imparts training to the SAI officials of other countries.  

Even after having such an important institution with such an important assignment having indirect effects on administrative actions and processes and which is popularly called as interface managers for Parliament, Media and the General public has all ability to ensure better governance with a effective role but unfortunate thing is, in-spite of its presence, failure of governance is annoying and it regularly soliciting the reasons of malfunctions in the governance. The reasoning of its failure is discussed in the next part.

Audit in Governance and Stumbling Blocks in India

I can firmly say that SAI, CAG has full ability to ensure good governance in the Country. The recent CAG’s report on 2G Scam, CWG Scam are just two examples to show the importance of Audit Institution in fixing accountability and ensuring transparency and in all, working for good governance but all hard work of Institution in assuring good governance goes into vain because of severe institutional and operational limitations. A detailed discussion on these limitations is as below:

Non-Action on the part of PACs

Firstly, because of no action by the government or PACs on the reports prepared by the Audit Institution, the accused remained scot-free which in further make no deterrent impact on others. PACs who are special committees in the Parliament of India and the State legislatures and who takes reports of the CAG into consideration and set the further action but unfortunately, they do not have any time to examine the audit reports. This proves a major barrier and stumbling block in bringing the good governance. Many studies have highlighted this lacuna; in one of the study, it has been observed that from 1947-48 to 1987-88, out of 13,457 paras only 5409 were examined by the Central PAC which constituted 40 per cent.[28] During 2003-04, out of 759 paras/reviews in Central Audit Reports, the PAC selected only 93 but could examine only nine paras in the 11 sittings held.[29] In the States at the end of 2004, 12,000 paras were pending out of which State PACs could examine only around 500 paras (about four per cent). In some States, audit reports are pending discussion from 1983-84.[30] Even in respect of the few paras and reviews examined by the PAC, adequate action is not taken by the government. No adequate action is taken on paras not selected by the PAC. This inaction on reports by the PACs or Government results in non punishment of culprits and in the end, malfunctioning of governance.

No Legal Power 

Secondly, it has no legal power to enforce action on his findings and even, it cannot compel departments to take disciplinary or criminal action against defaulting officers. Such is the helplessness of such an important Institution. These stumbling blockages in the path of audit for ensuring good governance needs complete eradication for which certain statutory powers of CAG need to be enhanced.

Enhancement in Audit Power: A step towards good governance

The recommendation for enhancing powers of Audit Institution is divided in the following parts:

a)Legal Powers

The Audit Institutions in Australia, Japan and New Zealand have been vested with wide powers of investigation, enforcing recovery of loss of government money or property, imposing surcharge and compelling departments to take disciplinary or criminal action, as the case may be, against felonious public servants. Even the neighboring Country, China according to its Audit Law, the Regulations for the Implementation of the Audit Law and other relevant regulations, provides for Power to investigate and obtain evidence, Power to adopt mandatory measures[31] and Power to deal with and punish etc. But, in India, the CAG’s (DPCS) Act, 1971[32] provides that the departmental officers should produce records asked for by audit and give replies to queries raised by audit. If, however, the departmental officers do not comply with these provisions, the CAG has no power to enforce compliance except to make mention of it in his audit reports. CAG should be empowered with important powers as given in other countries. Power to compel departments to take criminal action against offending person is importantly required.

Secondly, with regard to PACs, there should be a statutory provision prescribing dates of submission of Appropriation Accounts and Finance Accounts duly certified by the CAG to Parliament/State Legislatures and their examination by the PAC. The PAC should find time to examine all reports of the CAG within one year of their submission to Parliament/State Legislatures and should complete examination of accounts as soon as possible and after that, government should take further action expeditiously on the PAC report. In last, the whole chain should be completed in a fixed time. Except the legal aspect, certain changes are required at Institutional level which are as below:

b) Institutional Powers

Firstly, effective Communication between PACs and Government to work upon the reports prepared by Audit Institution is required. The PAC should interact with the CAG and give its priorities so that the CAG brings forth reports which interest the Committee because in the USA, 80 per cent of the audit reports emanate from the suggestions of the legislators.[33] Such a work culture in India will yield fruitful result.

Secondly, at Institutional level, CAG should work for better understanding between its office and the media because both are important pillars of better governance and share approximately similar goals having an eye on the public purpose. Mr. Ralph Frammolino[34] rightly believed that both pillars have the public’s interest at heart and in a democracy, they are considered among the most reliable government watchdogs.[35] Moreover, CAG doesn’t release its reports or convene press conferences to discuss issues, despite the fact that it is among those few high officials who are not bound by any oath of secrecy. The releasing of report in press will help the public to get the information about government’s financial performance; mismanagement etc. and the same will pressurize the government to act fast.

Thirdly, Enabling Institutional Environment is also required for smooth and better functioning of CAG. This includes a mandate which is clearly defined by law, the guarantee of access to all information held by government bodies, the ability to request investigation by law-enforcement agencies.

CONCLUSION

In light of the above discussion, I can firmly say that Audit Institution has played, is playing and will continue to play an important role in a democratic India. It has a very big responsibility to answer of which it is doing in a remarkable manner. I just want that certain legal powers and institutional reforms as suggested in the main text should be given to the Audit Institution so that it can answer its responsibility with more effectiveness.