Sucheta Dalal :Why audits by the CAG really matter
Sucheta Dalal

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Why audits by the CAG really matter  

Nov 21, 2005

In the early 1990s, the government issued a single line order scrapping control over capital issues. The feeding frenzy that followed the decision killed the primary capital market for nearly a decade and the government is still struggling to trace and punish dubious businessmen who vanished with investor’s money.


The J.J. Irani Committee proposal to scrap the comptroller and auditor general’s (CAG) audit of public sector undertakings (PSU), which has apparently found favour with the government could easily lead to similar consequences at these companies. The CAG is a constitutionally constituted body, which acts as the eyes and ears of Parliament with regard to the working of government-owned companies.


That is why CAG audits, unlike the statutory audits of companies are more qualitative. They identify instances of fraud, mismanagement, waste through unnecessary delays, injudicious procurement of raw material or equipment, irregular disbursement of funds, non-compliance with various government rules and guidelines and even idle investment leading to blockage of funds or losses.


The Irani Committee claims that CAG audits are superfluous and only duplicate the work of statutory auditors. This is simply not correct. However, its recommendation to scrap these audits clearly finds favour with PSU managements and politicians. Naturally enough, they find the CAG’s scrutiny judgemental and nit-picking and would be happy to rid themselves of this accountability.


But let us not be in a hurry to throw the baby out with the bathwater. Without the supplementary and propriety audits conducted by CAG, there will be no qualitative information available to the parliament. In fact, the Standing Committee on Public Undertakings (COPU) will also have to be scrapped. This will allow politicians to play havoc with PSU management at the cost of the exchequer and the tax payer.


Most private sector companies are owner-dominated. Although they are board managed, the owner has a clear vested interest in performance and profitability.


In the public sector these days, it is often the opposite. For instance, plenty of PSU chairmen are appointed at the pleasure of powerful politicians and don’t dare stand up to them. Board supervision and scrutiny is further eroded by appointing politicians, their relatives or party workers as independent directors and biddable bureaucrats as government nominees.


In recent weeks, we have witnessed how the Petroleum and Finance Ministries have attempted to pack PSU boards with Congressmen who have little knowledge about the business of these companies. Such directors will merely use their appointment to exploit the companies for themselves and their party. Heads of audit committees of PSU boards are also chosen from a cabal of politically connected Chartered Accountants.


But for the stern scrutiny of CAG audits, the PSUs would be ripe for exploitation and become unaccountable to parliament. After all, with politicians, management and so-called independent directors batting on the same side, it is only a matter of time before the company is run to the ground.


Former disinvestment commission chairman G.V. Ramakrishna minces no words when he says, ‘‘They will loot PSUs like a private fiefdom. PSU managements and ministers in charge must remember that they are not the majority shareholders of these companies’’. They are only ‘‘trustees of public money’’invested in the PSUs from the consolidated fund of India.


Another foolish idea is that CAG audits must be scrapped where government has less than a majority stake. This makes no sense. Either the government must privatise PSUs or strengthen their accountability to parliament and retain CAG oversight.


A halfway house is an eyewash. It will only protect those who want to milk it further. Having said that, the CAG also needs to move with the times. ‘‘The two problems with CAG audits are delays and the tendency to conclude that all commercial losses are always avoidable’’, says a top regulator and PSU supporter. The propriety and performance audits conducted by the CAG are the main bugbear. They are often righteous and do not take into account the exigencies of rapid decision making required in competitive business environments.


This charge has more than a grain of truth and can be addressed by improving the training and audit procedures, compressing the time in which they are conducted; or, merging the statutory audit with the supplementary audit under the CAG. But let us first concede that in recent years, the CAG has repeatedly unearthed examples of several hundred crores of rupees each that were lost by imprudent managements decisions.


In the hurry to scrap CAG audits, it is important to note that the writ of the Government Accountability Office (GAO) of the US, often called the Congressional Watchdog, not only runs over federal and local entities owned by the government, but also looks at joint ventures with foreign agencies and enterprises/bodies that are substantially funded by the US government (although not owned by it). Many other countries have similar oversight mechanisms.


If adverse CAG reports (easily available on the internet) do not attract public and media attention beyond the initial splash, it is because the organisation has powers to bark, but not to bite. Corrective action through systematic follow up has to happen through the Parliament.


However, political parties and their public representatives today are completely disinterested in such issues except for the occasional oil-for-food scam, which is useful to embarrass the ruling party and disrupt parliament. This is evident even from a sample scrutiny of the reply to parliamentary questions or the string of inaccuracies or omissions in action taken reports.


If the government wants PSUs to compete on equal footing with the private sector companies, the answer is privatisation, not the removal of existing checks and balances. On the other hand, since public sector reform is going to be restricted to creeping disinvestment (Shipping Corporation of India is a good example where the privatisation plan has been dumped in favour of 15 per cent disinvestment).


The government needs to strengthen the CAG through better automation, training and adequate empowerment. Recent corporate scandals all over the world lead to the clear conclusion that a Statutory Audit alone is inadequate to ensure public accountability of government owned companies.


-- Sucheta Dalal