An Introduction and brief review of Public Sector Audit in India

2 Historical background of audit in India 2 The Indian Audit and Accounts department (IAAD) has a history dating back to 1858 when the East India Company administration was taken over by the British Government First act for audit was formed in 1913 under the name of Indian Companies Act The Government of India Act 1935, gave further recognition to the importance and status of the Auditor General. Introduction of constitutional reforms in 1919 brought statutory recognition to the Auditor General In Dec The Finance Minister agreed to enact a law covering all government companies and also making it compulsory to have them audited by the CAG (Comptroller and Auditor General of India) The reports were presented to Public Accounts Committee (PAC) The Companies Act, 1956, empowered the CAG to appoint statutory auditors to audit and report on the annual accounts of government companies, issue directions to the statutory auditors as to the manner in which the audit is to be conducted, and iii) conduct a test/supplementary audit and to comment on or supplement the (statutory) auditor's report. In 1971 The duties, powers and conditions of Service Act 1971 (DPC), mandates the CAG to audit government companies under the Companies Act.

3 Administrative structure of Modern India India is a federal union of : 28 states 7 Union territories The states and Union terriotories are further divided into Districts Governing bodies: Nationwide there is a central Govt for each sector Each State has its own governing bodies - Chief Minister and Governor

4 Organisational Structure 4 Comptroller and Auditor General of India (CGA) is the head of the Indian Audit and Accounts Department Comptroller and Auditor General of India is appointed by the President She/He is appointd for the term of six yrs. All reports of the union made by CAG are presented to the President who in return present them to both houses of the parliament All reports of the State made by CAG are presented to the Governor who in return present them to both houses of the parliament The offices of IAAD are spread throughout the country. 34 Union Government Audit Offices headed by Director General/ Principal Director of Audit 60 State Accounts and Audit offices headed by Principal Accountant General and Accountant General. There are personnel in the IAAD with about 500 Group A officers belonging to the Indian Audit and Accounts Service (IA&AS).

5 Organisational Structure ctd.. 5 The organisations subject to the audit by Comptroller and Auditor General of India (CGA) are: All the Union and State Government departments and offices including the Indian Railways and Posts and Telecommunications. About 1200 public commercial enterprises controlled by the Union and State governments, i.e. government companies and corporations. Around 400 non-commercial autonomous bodies and authorities owned or controlled by the Union or the States. Over 4400 authorities and bodies substantially financed from Union or State revenues Audit of Government Companies (Commercial Audit) companies where the equity participation by Government is 51 percent or more, CGA gives the auditors directions on the manner in which the audit should be conducted by them PPP (Public Private Partnerships) projects (not in all cases) )

6 Audit structure in India 6 Supreme Audit Structures (SAI) also known as Regulatory audit audit of financial statement state auditors do almost the same kind of job which the Chartered Accountants do while auditing a public limited company. Comptroller and Auditor General performs Evaluation and Value for Money Audit which in other words is also called 3Es Audit Economy: minimising the cost of resources used or required - spending less; Efficiency : the relationship between the output of goods and services and the resources to produce them- spending well; Effectiveness: the relationship between the intended and actual results of public spending - spending wisely. Comptroller and Auditor General can demand revision of audit performed by SAI Yearly about 30 PSUs have to re-audit and revise their reports

7 Three vital differences between Statutory and CAG audit The CAG's reports on government companies highlights avoidable/wasteful expenditure, loss of revenue, losses owing to the inefficiency of managements, improprieties and so on. improves the accountability of these undertakings The statutory auditor's report contains only an opinion and deals with matters that are statutorily required. As government companies have greater accountability to the public to be enforced only through the audit reports to Parliament and State legislatures the scope of an audit by a statutory auditor is limited to certification of "true and fair view" of the state of affairs of the company as revealed by its annual financial statements. CAG examine the issues of propriety, regularity, efficiency ie. Performance based audit The reports of statutory auditors do not take into consideration the peculiarities attached to government companies and the policies the government seeks to implement through them.

8 Biggest challenges facing CAG Supreme Public auditor which is CAG need to be legally equipped with an enforceable mandate Stakeholders seek greater assurance about the funds being spent in accordance with the objectives for which these were allocated the quality of governance. CAGs shpuld behave rights for manadatory audits for channels such as PPP & NGOs. About 50% of the plan expenditure is now being purveyed through PPP, NGO & PRI bodies Audit by other auditors like CAs appointed by these bodies are at best in the nature of internal audit Lack of implementation of Accrual based accounting CAG have been noticing innumerable deficiencies in the functioning of the current internal audit system of the government. Is helpless in imposing any kind of sanctions on these organisations

9 Biggest challenges facing CAG (2) Exclusions of organisations from CAGs Audit wekanes Paliamentry oversight on them Increased instances of Central Ministries seeking exclusion from the audit by CAG of new Institutions created or being created. Regulators like the TRAI, Petroleum and Natural Gas Regulatory Board (PNGRB), etc. have been kept fully or partially out of the audit mandate of CAG Denial of timely and complete access to records to CAG audit. there is no mechanism for timely production, or in the failure to do so, awarding deterrent penalties for non furnishing or incomplete production of records to CAGs audit.

10 Some of these challenges lead to fruads.. Key contributing factor

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