Generalizing a Central Audit: The pros and cons

Ritu Bhandari Words of Freedom Leave a Comment

When you check your work before sending it across to another person, you perform an audit. All of us are faced with different type of audits at our own levels. In school, we are evaluated through exams. At work, after a point, it is a standard practice for us to assess our own work. We all go through different types of checks, appraisals, assessments and examinations, both by ourselves and by others. In fact, work could be left meaningless if not for audit.

In our last Weekly Your View poll, we asked you whether government agencies should be allowed to audit the accounts of private entities. Out of the 17 polltakers, 47% of you believed that government agencies should not be allowed to audit the accounts of private companies while 35% of you believed otherwise. The remaining 18% of you believed that there should be some kind of public audit of private companies and that government agencies should be allowed to audit private entities if there is any involvement of public funds.

In India, it is compulsory for every company, whether public or private, to get their book of accounts audited as per Section 224 of the Companies Act of 1956. In case of government bodies, the Comptroller and Auditor General of India (CAG) is responsible for the audit through the Indian Audits and Accounts department. In the case of public entities, auditing derives its significance by principally having a welfare effect in the form of government accountability for public resources. It acts as an appraisal of the government’s performance in the past and helps planning in the future.

For private enterprises, which occupy a major share of the economy’s transactions, auditing plays an important role but it is a way for them to grow further and increase profits. It is the company’s check for itself and its shareholders to who it is accountable. It cannot be denied that private and public enterprises are tremendously different in their structure, working as well as goals. One of the most simple but consequential mistakes that a country can make is mixing their roles. The whole point of their being audited may be very different. For instance, a private firm may appoint an auditor to compensate for the loss of control that is inherited in a hierarchical organisation as a longer chain of commands reduces the top manager’s ability to observe subordinates’ actions. Since this is not the purpose of the audit of a public organization, mixing these roles will not only lead to uncertainty of purpose but also confusion of their functional roles. Auditing should be treated as a serious concern and only methods that encourage enterprises to excel further should be adopted. It should not be forgotten that India’s economy is lagging behind in the time equivalent to some years and its not the time to come with ways to push it back further.

Recently, in the Association of Unified Telecom Service Providers and others versus Union of India, the Supreme Court (SC) permitted the CAG to audit private telecom companies. The court ruled that the CAG was authorised to examine the accounts of even private companies if such companies were dealing in natural resources. The judgment attributed to two main reasons: The SC held that these telecom companies were dealing with one of the most important natural resources (spectrum) of the country and two, the SC held that any private entity with even a distant link to Consolidated Fund of India should be audited by the CAG. However, this brings with itself certain paramount concerns. Especially in this particular case, with this point of view, public-private partnerships come across as a way of unwanted invasion. It will degrade the autonomy of these companies as there is a very high probability of unwanted interference by the CAG in areas where it is not required. Also, such interference will affect the decision-making powers in these companies having a negative effect on their overall performance. It is not to be forgotten that this judgment comes when telecom companies are already subjected to multiple checks. And, in spite of those checks, this sector has gone through several big scams in the past. That is the clearest indication that increasing the number of checks cannot be a solution to the problem of corruption or misuse of public resource.

There is requisite of some serious thinking here. We seem to be trending towards lesser autonomy and higher regulation putting economic development at stake. Different countries follow a wide range of auditing rules. In fact, in some countries, such as the US and Japan, private firms operate without any requirements by law to disclose financial statements. In India, the process of audit can be traced back to ancient times, important legislations coming up during the British rule. The scope and purpose of auditing has gone through a number of possibilities. In the mid-nineteenth century, for example, it was largely accepted across the world that auditing was more a way of providing opinions than performing checks. This changed gradually as more logical and data proven ways of auditing also came into picture. Its purpose should be given its due importance by adopting innovative solutions rather than proposing audit as a panacea for any illness. Today, the justification for allowing PPP to be audited is their use of natural resources. Tomorrow, what would stop the justification that a company should be audited by the CAG as the company uses ships that ply on oceans? Are we adding new problems in the name of solutions?