The Telegraph
Since 1st March, 1999
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- While an audit must find fault, it must also look at performance

Recent events in Parliament have highlighted the importance of the system of governmental audit in India. The fracas about the public accounts committee particularly emphasizes the importance of audit reports. The comptroller and auditor-general of India is an important constitutional authority. He enjoys considerable constitutional safeguards in recognition of the importance of his role.

Audit reports, by definition, partake of the nature of fault-finding. The CAG’s reports in India have also occasionally irked and irritated the government in power. An episode of such a nature between the CAG and the government was the one which unravelled irregularities with regard to the purchase of jeeps in London, when the late V.K. Krishna Menon was India’s high commissioner. The then CAG was A.K. Chanda, another favourite of Jawaharlal Nehru. Nehru was caught on the horns of a dilemma, but weathered the debate on the audit report and carried the matter to its illogical conclusion. Krishna Menon’s bona fides were never in question. The CAG also established his credentials as an authority set up to explore and find out irregularities. It speaks volumes for the democratic traditions, which Nehru established, that the CAG’s personal motives were never questioned.

Recently, the CAG was at the receiving end of very strong criticism from the prime minister, Atal Bihari Vajpayee. In an address to the annual conference of accountant-generals of India, Vajpayee bemoaned the tendency of audit reports to concentrate on fault-finding. He felt that the existing audit system has reduced the executive to becoming a prisoner of procedures rather than an achiever of purpose. He further expressed the view that managers have been complaining that the present system has inbuilt disincentives for taking commercial decisions in a timely manner. The overwhelming fear of possible audit remarks forced most of them to play it safe and take shelter under procedures and technicalities.

While the spirit of the prime minister’s objections to the current practices of audit is right, it is possible to argue that audit by its very nature has to concentrate on finding faults. An audit, which only looks at merely the question of whether a fair and true presentation of accounts has been made, does not look into questions of propriety. Parliament has cast on the CAG the far higher responsibility of looking into the propriety of actions of the executives from the financial point of view. It is inevitable that an auditor who raises these issues has to end up finding faults. Audit reports are the analogue of drain inspectors’ reports. The CAG is bound to find fault where it exists.

At the same time, it is fair to recognize that audit has tended to be focussed more on processes rather than on content. Auditors tend to look at whether proper procedures have been followed rather than at whether any deviations from procedures may have achieved a purpose in a more efficient manner. Audit, as is presently constituted, tends to be directionally in favour of those executives who have followed procedures and rules in letter rather than in spirit.

Fear of audit objections exhibits itself in executives of governmental organizations being unwilling to take a decision which deviates from rules even if justified by facts. This is particularly true in respect of purchase decisions, which are often the focus of audit reports. Governmental decisions on purchases are overwhelmed by the principle of buying the cheapest. The lower tender then scores even at the expense of quality. Calculations justifying a slightly higher price in return for a better quality are viewed with suspicion by auditors. While it is true that of late auditors have become better-equipped to understand the technical justifications for such variations from buying the cheapest but buying the best, the fear of being pursued by audit and consequential “recoveries” haunts the executives.

The answer to this will have to be better education of the executives about audit procedures and auditors about the complexities which confront an executive taking a purchase decision. This is particularly true in respect of defence purchases, where arguments of efficiency and cost effectiveness are often clouded in a mist of continuing technical arguments.

The PAC, which has recently audited defence transactions, may be very well justified in asking for a copy of the report sent to the Central vigilance commission, if such a report exists. There have been doubts cast on the very existence of the report. But it goes without saying that the CAG, as a constitutional authority, is entitled to information no less than any other authority of the government, including the CVC. The PAC is well within the limits to ask for documents, which are stated to be confidential. What is not confidential to the CVC cannot be confidential with reference to PAC.

The root cause of delays and inefficiencies in government is not, however, so much the audit as the fear of continuous pursuit by other agencies of invigilation, such as the CVC and the Central Bureau of Investigation. One of the senior ministers of the government of India recently referred to this combination of inspectorates as three “Cs”, which hamper decision-making in government. I had already referred to the paralysis of decision-making in defence in my earlier piece published in this newspaper. The remedy for this is not to attack audit per se, but to insulate the bona fide decisions of executives of government from continuous pursuit by invigilators once it is established that the decision has been taken keeping in view all procedures and practices.

A possible solution has to be found by subjecting such cases of alleged deviations to a committee of experts, which should include a serving or recently retired officer of defence, a judicial representative and an eminent person of integrity, who should go into the merits of the transactions without over-emphasizing the procedural aspects. It should then be decided that if the transactions otherwise justify the decision, motives should not be attributed to the officers involved. This applies as much to the ministers as to the officers.

Audit reports have particularly greater potential for doing harm in respect of commercial undertakings in which the government has a controlling share. In our approach to reforming the structure of audit, we have to emphasize more the need for inculcating efficiency in the public sector or such elements of the public sector which remain after the current process of disinvestment. Public sector units are treated as a “state” in respect of Article 12 of the Constitution of India by virtue of control by the government. The approach to improving the efficiency of the public sector cannot confine itself only to reducing the rigors of audit. If we aim at a level-playing field between the public sector and the private sector, we have to ensure that the rigors of audit and inspections by the CBI and CVC are reduced in respect of PSUs.

While a discussion on the means of improving the efficiency of the PSUs is beyond the scope of this article, it is important to emphasize that one has to think radically about the issue if the purpose of eliminating inefficiency is to be met. One way out may be to delimit the scope of constitutional safeguards under Article 12 in respect of PSUs, which have to meet competition in the commercial field. The judgment of Justice Shamim of the Delhi high court in the case of Maruti Udyog Limited (1991) is significant in this regard. I quote: “Although Maruti Udyog had a majority of its Directors appointed by Government, it was outside the scope of Article (12) to the extent of its agreement with Suzuki since there was bound to be control by the collaborator.”

This opens a space for similarly differentiating between PSUs in the matter of openness to public interest litigation and the like in respect of hiring and firing as well as purchase decisions. This is the only way we can make our public sector have a level-playing field with the private sector. There is no point in targeting the CAG alone in this regard.

While it is true that audit cannot eliminate emphasis on fault-finding, it has also to change its ways, which go beyond procedures. It should become more genuinely a management audit, which emphasizes performance rather than observance of rules and regulations. This requires a different mindset among auditors as well as among administrators. Whether the CAG can become a management auditor of government is a matter which calls for further examination from the constitutional perspective.

The criticism that the prime minister has levelled against the current procedure of audit has come at an appropriate time. While it has naturally received considerable attention in view of the current debacle in Parliament, it is important in itself. The prime minister has rightly initiated a debate on the role of audit.

The prime minister has posed an important challenge before the auditors. The CAG has to re- invent his role so as to serve a national cause of achieving efficiency with financial integrity. A national debate on the role of the constitutional authority, such as the CAG, is both timely and appropriate.

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