One of the primary functions of audit is to see that provisions of law, rules and regulation are properly applied while incurring expenditure or collecting revenue.

In order to regulate usage of money, elaborate rules and regulations have been drawn by government. While audit notices systematic violation of law, rules and regulations by departmental officers it is unable to take an effective action to prevent them.

The Bihar fodder scam will illustrate the point serious financial irregularities and misappropriate of government funds were being committed by senior government functionaries and the Treasury officials all acting together in collusion the Accountant General (AG) Bihar could not detect the irregularity in time as Treasury officers suppressed the vouchers through which money was drawn and did not transoms them to AG thus preventing its audit. C&AG has been making mention of excess drawl over voted provision in its Audit Report presented to Bihar Legislature but Public Accounts Committee, it is said, did not eve meet to discuss the report leave apart take preventive action.

After the scam became public knowledge, C&AG has produced a well documented Audit Report but it is more a case of getting wise after the event – after crores of public money has been looted and shutting the stable door after the steed has been stolen.


The accounts-keeping of State governments companies is in chaotic state. Out of about 900 State government companies the Annual Accounts of as about 700 companies is in arrears sometimes for periods as long as ten to twelve years.

The Companies Act stipulates that the Annual Accounts of these companies should be got audited by Statutory auditors (Chartered Accountants) and C&AG within six months of the close of financial year viz. 30th September. Should a situation where management of these companies violate with impunity the legal provision laid down in the Companies Act be allowed? Similar is the situation with large number of autonomous bodies, which receive substantial grant from government every year.

Many of them do not submit their Annual Accounts in time for audit. In numerous cases, accounts when prepared do not follow the accounting standards, contain serious mistakes and when pointed out, the concerned organisations refuse to rectify the errors. And yet they continue to get government grants every year.

Should not C&AG be empowered to take legal action against management of such defaulting organisations, so that tax payer is assured that no misuse and misappropriation of public funds has taken place?


Legal Position

Section 13 of the Comptroller and Auditor General’s Act, lays down that it is the duty of audit: to ascertain that the money, which has been disbursed, was legally available for the service or purpose on which it has been applied and there is a proper authority to spend the money. What happens when a public official spends money, which is not legally available viz., it is in violation of laid down rules and regulations.

The Act is silent about it – all that the last sentence of Section 13 says, “in each case to report on the expenditure, transaction or accounts so audited by him.” If the C&AG make a report about the irregular usage of money to the Departments whose officials have committed the default and they contest C&AG’s decision or do not take any action, it virtually amounts to the departments sitting over judgement on C&AG’s findings and obstructing the duty he is required to perform under the law. In no other country of the world the State audit finds itself in such a helpless situation.

Position in Advanced Countries


Most Supreme Audit Institutions (SAI) have been vested with powers to fix responsibility on the officials who have caused loss to the exchequer and have legal power for its recovery. In New Zealand under the Public Finance Act of 1977, the Controller and Auditor General(CAG) is empowered to hold an enquiry which may require any evidence to be given either orally or in writing and to which the provisions of Crimes Act relating to perjury applies.

The CAG has power for surcharge if he finds that there is deficiency or loss of money or store caused through fraud, mistake, default, negligence, error or improper or unauthorized use. In Japan the Board of Audit has powers to adjudicate and can order an official to indemnify the loss and direct the supervising officer to take disciplinary action against the delinquent official when it finds that the official has caused grave loss to the State either deliberately or by gross negligence. Functions like a court may order accounting officers to settle uncollected revenue or irregular expenses out of their own resources, if during an investigation it finds that the accounting officer has failed to provide satisfactory justification- on the ground that they have formal personal responsibility. Hindering Court’s investigation may give rise to a monetary fine. The judgments of Court are legally binding and can be appealed only on points of law.

Need for Conferring Legal Powers

The situation in our country needs to be remedied by conferring legal power to Audit Officers to enable them to implement their findings by making suitable provisions in the C&AG’s Act on the lines enjoyed by State audit institutions of other countries.


The Act should entrust Audit Officers with following powers: (a) powers to summon the concerned officers before it for evidence on oath and (b) where default is established, after giving due opportunity, they be required to make good the loss, (c) in case the official does not make good the loss and the default or neglect is established, a report be made to the superior authority of the department where officer is working for taking disciplinary action under the Civil Services Conduct Rules, (e) where action of public official involves criminal liability, the public prosecutor be informed either by Audit official or by the Department to which he belongs for initiating criminal action under the Penal code.

For discharging this quasi-judicial function the powers similar to those available under Commission of Enquiry Act be vested with the Accountant General / Principal Director of Audit who are heads of department by making suitable legal provision to that effect. To make the system transparent and fair there should also be a provision of appeal with final appellate stage at the level of Comptroller and Auditor General at the headquarters of C&AG’s office.

Need for Collegiate Decision: Audit Commission

In our country there is no system of finalisation of audit reports through a formal committee system in which the Dy CAG/ Accountant General / Principal Directors of Audit participate. The audit reports both of the Central and State governments are processed on files by the Dy CAG and Addl Dy CAG and approval of C&AG taken.


The expenditure and revenue transactions of the government have increased hundred fold with tremendous growth in government’s activities after independence. It is simply not possible for one individual viz. C&AG to be responsible for all audit work of Central as well as State government.

There is need for wider sharing of responsibility. The existing system results in neglect of audit and poor quality of Audit Reports. There is also no system of discussion with Secretaries to government/heads of department before the Audit report is finalised.

This leaves a yawning gap in the Report, facts and conclusions are often challenged with the result that the main purpose of audit viz. improvement of the administrative set-up and the systems and procedure takes a back seat.

The existing system needs an overhaul. Audit Reports should be finalised through collegiate decision making of an Audit Commission in which all the Dy CAG’s and Addl Dy CAG’s should be represented besides C&AG. The position of C&AG should be that of primes inter pares. For proposed Audit Commission to be effective its members should be given a status similar to that of a High Court Judge with age of retirement as 62.


Strengthening PAC

The two Parliamentary Committees PAC and COPU are able to examine only a few paras and reviews out of large number of audit reports submitted to them which defeats the very purpose of parliamentary financial control and the accountability of Executive which the Parliament is required to enforce.

For example, during 1997-98 out of 16 Reports submitted to Parliament containing 1209 paras/ reviews the number of paras / reviews selected for examination was 76, out of which only 16 could be discussed by the PAC. In States there is a huge backlog of work before the PAC’s.

In order to strengthen parliamentary control over executive it is necessary to devise a system which envisages that PAC examines all the reports submitted by CAG and submits its recommendations to Legislature within a time limit of say 18 months.

This is possible only if the volume of CAG’s Audit reports is reduced and their quality and content improved and only matters of critical importance are included in the Audit Reports. (Other financial irregularities noticed during audit need to be settled with the concerned Ministries/ departments through forums such as Audit Committees which need to be devised in consultation with Ministry of Finance).

For PAC to function effectively and its members to develop specialisation, the life of PAC be made five years co-extensive with the life of Parliament/ State legislature with one-third of members retiring every year.

It to be taken for consideration, whether PAC is given a Constitutional status with clearly defined mandate, duties and functions

C&AG and Parliament

In parliamentary democratic form of government, State audit tends to be classified as part of legislative branch as the institution has developed over time to implement the power of the purse State audit with its access to information and review of governmental activities fulfills an increasing important role in providing legislature with detailed reliable information necessary for control, realisation of this fact has led to major restructuring of the audit department in U.K with the passing of the National Audit Act of 1983.

Under the Act, C&AG has been made an officer of the House Commons. Another Commonwealth country, Australia, has fallen in line with British system and a 1997 Act; Auditor General will be an independent officer of Parliament. In U.S.A the Accounting Office from the time of its constitution in 1921, has been recognised as an agency within the legislative branch of the government and enjoys a special working relationship with the America Congress.

It is for consideration whether C&AG should be made an officer of the Lok Sabha so that he could work in greater cooperation with Parliament and its Finance committees with a view to make parliamentary financial control more effective.

Arc’s 14th report on financial management

• In this Report on Financial Management, the Commission has examined the issue of reforms in the public financial management system as a part of the overall governance reform. Efforts aimed at im­proving the efficiency, responsiveness and accountability of Government organizations have to be complemented by reforms in financial management system in order to deliver the desired outcome.

In accordance with its terms of reference, the Commission has largely emphasized the expenditure size of public finance in India with particular attention to proper maintenance of accounts, smooth flow ol funds and strengthening of internal and external audit mechanisms.

• Maintaining financial discipline and prudence while simultaneously ensuring prompt and efficient utili­zation of resources to achieve the goals of different government agencies has to be the underlying theme for all government agencies.

Towards this end, accountability needs to shift from compliance with procedures to a much greater focus on results and outcomes. Tools of modern financial manage­ment like information technology and financial information system need to be used to improve account­ability combined with accurate budgeting and realistic economic assumptions.

• In order to reform the financial management system in India, the Commission has suggested adoption of medium term plan/budget framework and alignment of plan, budget and accounts, in order to bring greater synergies between the annual budgets and the five year development plan.

A paradigm shift from the traditional bottom-up approach to budgeting to a top down technique focusing on broader resource allocations as well as on outcomes rather than processes has also been recommended. This has to be combined with greater operational autonomy to government agencies and decentralization of administrative and financial powers to them in order to improve their efficiency.

• Any financial management system, howsoever sound, will not be able to deliver the desired outcomes unless there are strong internal and external oversight mechanisms. The Commission has therefore recommended measures for strengthening of both internal and external audit mechanisms.

• The 13th Finance Commission recommended that the debt-GDP ratio of the Centre be cut to 45% by 2014-15. It has suggested that the Centre wipe out its revenue deficit and that the fiscal deficit should be reduced to 3% of GDP by 2013-14.