In late September, it was reported in the media that the Centre is planning to take away the powers of the Comptroller and Auditor General of India (CAG) to scrutinise and audit the working of government companies and public sector undertakings (PSUs), and instead give this task to chartered accountants. J Venkatesan, writing in The Hindu dated September 25, 2005, reported that a committee has been asked to draft a Bill to do away with the role of CAG on 1200-or-so government companies and PSUs (including 49 listed companies), and that the Bill is likely to be ready for consideration in Parliament soon.

This move is said to have its basis in the report of the J J Irani Committee, which was constituted on December 02, 2004 by the Government of India under the chairmanship of J J Irani, Director, Tata Sons with the task of advising the Government on the proposed revisions to the Companies Act, 1956. The committee had presented its report to government on 31st May 2004. The Irani Committee's argument was that since audits of the PSUs' operations are conducted by statutory auditors appointed by the CAG in the manner directed by him, no supplementary audit of these companies by the CAG itself is necessary. But criticis point out that this reasoning is flawed - the statutory audits do not look at the propriety of companies' conduct; their lens is more narrowly focused on operational matters, typically to keep the books in order.

This is not the first time the legislature has tied to dilute the role and functions of the national auditor. Similar attempts have been made in the past - in 1997, 2001, and 2003 - to introduce such a measure but they were all disapproved of by Parliamentary Standing Committees, and therefore had to be shelved. Now a renewed attempt appears to be in the works.

The role of the CAG

The government's plans to dilute the CAG's powers must be considered in light of what the CAG himself - Vijayendra N Kaul - had to say only a few weeks earlier. Inaugurating the 23rd Conference of Accountants General on September 20th in New Delhi, he feebly voiced his concern for ensuring the accountability in the use of public resources, with these words: Of late there have been references to the reform of Commercial Audit and the role of CAG with respect to audit of Government companies. The matter is being considered by the Government of India ... I hope that any change in the existing scheme would take into account international practices for securing public interest and public estate involved in the PSUs. It is essential that space should be found for legislative supervision through effective public audit to protect not only public estate but also public interest wherever public monies are involved. This is not a management issue but an accountability issue closely related to statutory safeguards.

The Comptroller and Auditor General derives his duties and powers as the nation's supreme auditor mainly from Articles 149 to 151 of the Constitution of India, and from the Comptroller and Auditor General's (Duties, Powers and Conditions of Services) Act, 1971. The mandate of CAG includes audit of

• Receipts and expenditure from the Consolidated Fund of India and of the State and Union Territories.

• Transactions related to the Contingency Funds and Public Accounts.

• Trading, Manufacturing, profit and loss accounts and balance sheets, and other subsidiary accounts kept in any Government departments.

• Accounts of stores and stock kept in Government offices or departments.

• Government companies as per the provisions of the Companies Act, 1956.

• Corporations established by or under laws made by Parliament in accordance with the provisions of the respective legislation.

• Authorities and bodies substantially financed from the Consolidated Funds.

• Any Body or Authority even though not substantially financed from the Consolidated Fund, the audit of which may be entrusted to SAI.

• Grants and loans given by Government to Bodies and Authorities for specific purposes.

• Panchayati Raj Institutions and Urban Local Bodies.

Thus, if the government is indeed contemplating taking away the powers of the CAG to scrutinize and audit the working of government companies and PSUs, in doing so it would not only be overriding the CAG's mandate, it will also be trampling over the spirit of paragraph 4.3 of the Auditing Standards of the CAG of India, which to a large extent follow the auditing standards issued by International Organisation of Supreme Audit Institutions (INTOSAI). This paragraph reads as follows:

The entities managing public resources include commercial undertaking, e.g., entities established by statute or public sector undertakings established under the Companies Act in which the Government has a controlling interest. Irrespective of the manner in which they are constituted, their functions, degree of autonomy, or funding arrangements such entities are ultimately accountable to the Supreme law making body. [Auditing Standards, 2nd Edition, 2002]

Declawing an already chained tiger

As the JJIC pointed out, the CAG's reports do not create any binding requirements for the companies, or the ministries that control them, to modify their conduct in any way. But this is not a reason to remove the regulatory role, what is really needed is for the government to give the CAG's audits greater force so that erring companies and ministries can be forced to act in the public interest. The CAG has performed its role reasonably well, and the limited reform achieved through its audits should be a reminder that the scale of maladministration of public sector entities is enormous.

In recent years alone CAG reports have pointed out how guidelines of the Department of Public Enterprise were flouted by many companies: the telecommunication major MTNL invested in a bond issue of an irrigation corporation in Maharashtra; pre-disbursement conditions were brushed aside by Power Finance Corporation to disburse loan for a privatized hydropower project in Madhya Pradesh; speculative investors standing behind a controversial dam were favoured by Gujarat government-owned corporation by raising funds through "indiscriminate market borrowings", and so on. If the CAG were not around to perform its audits, would we come to know of these financial irregularities?

The audits also serve another important function. In many of the cases where the CAG found the public companies to be acting improperly, there had been prior accusations of misconduct. But these had been brushed aside as 'mere allegations'. The CAG's audits helped prove that the allegations were valid, thus bringing shameful conduct into a more open plane of accountability. Also, the Irani Committee's opinions on the CAG's audits of public sector undertaking used words such as "superfluous" and "duplicating audit work already done by statutory auditor". These opinions might have some value if the public companies were being run well, but that is not the case. The CAG has repeatedly found that profit and loss accounts of public undertakings inflate the assets and understate liabilities - flaws that the statutory audits should have found in the first place!

Rather than remove the CAG's role, what is neeed, in fact, is to give the auditor's findings more teeth - through rigourous follow-up of its audit findings by the Parliamentary Committee on Public Undertakings. Removing the CAG's role would only signal a green light to the maladministration of public companies.