Accounts and Audit
Francis Oakey defines the term as “Accounting is the science of producing promptly and presetting clearly the facts relating to financial conditions and operations that are required as a basis of management.” In the words of L. D. White “The primary functions of a system of accounts are to make a financial record) to ‘protect those handling funds to reveal the financial condition of the organisation in all its branches or purposes at any time to facilitate necessary adjustments in rate of expenditure, to give information to those in responsible positions on the basis of which plans for future financial and operating programmes can rest, and to aid in the marking of an audit.”
Accounting means maintaining a proper record of the finances of the organisation. Maintenance of accounts is the function of the spending authorities or the executive. Proper maintenance of accounts also show the legal use of funds, and on the basis of Account report, the spending officers justify expenditure to the superiors. Through a proper system of accounting wrongful use of funds can be prevented. Accounting has to ensure that funds have been legally used for the purpose for which the Parliament sanctioned it. Accounts should furnish data regarding the financial operations and should also secure fidelity on the part of spending authorities. The spending authorities should produce receipts or vouchers concerning every penny which they spend.
Thus, Accounting has a dual function to perform:
First is the determination of the fidelity of all officers who handle the fund. Second is the furnishing of information needed regarding financial condition and operation of policy-determination and administrative purposes.
Types of Accounting System The important systems of accounting followed at present are:
1. Double-entry Book-keeping: It is the system of accounting in which every item of expenditure is entered at two places. One entry remains with the operating service while another is sent to the Accounts Office if there is a separate department of the Government or to the controlling officer of the same service.
2. Cost Accounting: It is the determination of inclusive costs per unit. It may be applied in production, e.g., the unit cost of commodity manufactured in a government factory. This system is mostly made use of in the Public Works Department because this Department had a reputation for extravagance. By this system costs may be compared in a single institution or a single operation over successive periods of time and the comparative costs of similar operations in different agencies or in different jurisdictions may be determined.
3. Cash System: The cash system of accounts records transaction only when cash has been actually received or disbursed, while the accrual system records transactions at the time of commitment is made. Thus cash system disregards all operations of the actual type and seeks to record only those operations in which an actual transfer of cash has taken place. It gives us no information regarding the accrual of assets and liabilities but gives data regarding liquidation alone. Government mostly make use of the cash accounting system because it is simple.
4. Accrual Accounting System: It is that system of accounting by which the right to a receipt, or the obligation to make a payment, is established or is technically called, accrues. Under this system appropriate entry is made in the account books of all actions having for their result an undertaking with the right to an asset or placing it under an obligation to pay. This system is followed in France.
Audit is a systematic examination, of the books and records of a business or other organisation in order to ascertain or verify, and to report upon, the facts regarding its financial operation and the results thereof. Audit is a process of ascertaining whether the administration has spent or is spending its funds in accordance with the terms of the legislature which appropriated the money. Thus the main purpose of audit is to fix the responsibility of the officers of the government for any illegal or improper use of funds. An independent audit is necessary because it protects the state against misappropriation of funds.
Types of Audit
Audit may be broadly classified as Audit of Appropriations Accounts and Audit of Public Undertakings. Appropriations Audit is to ensure that the funds voted by the legislature are utilised by the executive for the purposes for which they were intended with due regard to economy and efficiency. It comprises: (a) audit from the point of view of accountancy and classification; (b) audit from the point of view of authority; (c) audit appropriation and finance accounts; and (d) audit from the point of view of propriety. Audit of accountancy is to see that the final accounts give a complete and true picture of the financial transactions. It is meant to check and detect frauds and technical errors in accounts. The booking of expenditure against the appropriate head and checking of supporting vouchers are part of this responsibility.
Audit of authority is meant to ensure that those who incurred the expenditure had the requisite authority. Cases where expenditure has been incurred in the absence or in excess of the requisite authority are highlighted in the audit report. Audit of appropriation is the most important part of obligatory audit. The primary duty is to see that the amounts authorised by the legislature are utilised for the purposes for which they are intended. Appropriations audit is to draw the attention of the legislature about overspending and under spending. Audit of propriety is to detect cases of extravagance and waste even when expenditure formally conforms to legality and regularity. Improper use of stocks and stores, unsound canons of financial administration, etc., fall within the audit of such ‘higher audit’.
Audit of public sector undertakings pertains to statutory corporations and government companies which have grown in number and variety both at the centre and in the states. These enterprises were given greater operational freedom. The accountability of autonomous statutory corporations is assured by their relevant statues for the maintenance of accounts as prescribed and their audit by an independent authority. Some are audited directly by the CAG and some others are entrusted to private firms of Chartered Accountants. CAG may conduct supplementary audit of these enterprises.
SEPARATION OF ACCOUNTS AND AUDIT
A considerable controversy has arisen with regard to the Indian practice of combining accounts and audit functions, which on the face seems highly incongruous. The system of combination of Accounting and Auditing in India has been the legacy of the British Administration, who had introduced it here on the grounds of economy and expediency contrary to the system followed in their own country. Although the system had come under review and attack from every reform committee, but it has continued, even after the adoption of the Republican Constitution. During the early fifties various pronouncements were made by the Public Accounts Committee to the effect that the existing system was fundamentally wrong in. principles, and recommended that the CAG should be relieved of his accounting responsibilities. It argued that the present arrangement under which the spending authorities are not responsible for the maintenance of a complete and up-to-date account relating to the transactions for which they are themselves accountable, and the responsibility for ‘which should lie on outside authority, is highly defective. As a result the Government in 1955 accepted in principle the separation of audit and accounts.
The Comptroller and Auditor General’s (Duties, Powers and Conditions of Service) Act which was passed in 1971 visualised the need for separating accounts from audit. In June 1975, the Government of India approved a scheme of departmentalization of accounts in a phased manner in all the Central Ministries and Departments. It was completed by October 1976. The requisite accounting personnel were transferred from the CAG’s establishment from 1978, the CAG is relieved of the duty of maintaining the accounts of the Union Government. The accounts of the State governments, continues to be compiled by the CAG.
Under the New system, the Secretary of the Ministry is the Chief Accounting Authority for all transactions of the Ministry and its attached and subordinate offices. He discharges this responsibility through and with the assistance of the Financial Adviser. The Secretary, as the Chief Accounting Authority, has a total and overall responsibility for the efficient working of the payment and accounting set up.
On behalf of the Chief Accounting Authority the Financial Adviser is responsible for the preparation of the budget of the Ministry and its department, for arranging payments sanctioned by the Ministry, for consolidation of the accounts for the Ministry as a whole, for the preparation of Appropriation Accounts for the Grants Controlled by the Ministry, for ensuring accuracy of accounts and efficiency of operation, and for the introduction of an efficient system of management best suited to the functional requirements of the Ministry and its departments.
Under the Financial Adviser, there is the Principal Accounts Officer of the Ministry/ Department of appropriate status heading on Accounts Department. His office is not only the Pay and Accounts office for the Headquarters Secretariat but also in charge of consolidation of accounts rendered by subordinate Pay and Accounts Offices. The attached and field offices of the Ministry are grouped under one or more Pay and Accounts Offices depending upon their size and spread. Each Pay and Accounts Officer is under the charge of an Accounts Officer and is manned by trained accounts staff.
The Pay and Accounts offices render monthly compiled accounts to the Principal Accounts Officer of the Ministry. He prepares the accounts of the Ministry as a whole by the end of the subsequent month. When approved by the Financial Adviser, these accounts are sent to the Controller General of Accounts in the Ministry of Finance who is responsible for establishing and maintaining a technically sound accounting system in the departmentalized offices, administer the accounting cadres and consolidate the monthly civil accounts which is now being done by the Accountant General, Central Revenues.
Controller General of Accounts The Controller General of Accounts is the apex accounting authority of the Central Government and exercises the powers of the President under Article 150 of the Constitution for prescribing the forms of Accounts of the Union and State Governments on the advice of Comptroller and Auditor General of India. The Controller General of Accounts is responsible, interalia, for:
1. Preparation and presentation to the Parliament of the Annual Appropriation Accounts (Civil) and Finance Accounts of the Union Government.
2. Ensuring a sound and effective internal audit and pre-check system in the Civil Ministries.
3. Preparation and consolidation of the Union Government Monthly Accounts.
4. Government disbursements and banking arrangements of the Ministries/ Departments of Government of India. It closely, monitors the extant system by means of periodical interaction with the Reserve Bank of India and Public Sector Banks on an ongoing basis.
5. Monitoring of expenditure in Civil Ministries through prompt and accurate accounting.
6. Enabling the effective utilisation of accounts as a tool of management by constant up-gradation of the quality of accounts, leading to improved financial control within the Government.
7. Ensuring effective and close monitoring of receipts of the Government of India especially those relating to Income Tax, Custom and Central Excise.
In order to maintain the requisite technical standard of accounting the CGA has power to inspect the Departmentalised Accounts Offices to ensure that the accounts are maintained accurately. For this purpose an Inspection Wing has, therefore, been set up in the Office of the Controller General of Accounts to carry out the duties entrusted to it under the Departmentalised Accounting System.
Besides a selective inspection of Public Sector banks handling Government transactions is also conducted through the Controller/Controller of Accounts in order to ensure that they follow the relevant procedure.
The Controller General of Accounts is also responsible for evaluating and processing the proposals relating to the capital restructuring of various public sector undertakings (PSUs) of the Union Government. Generally, the proposals involve appraisal of the strategy proposed for reviewing the Unit. Each proposal is evaluated on the basis of company specific options available. In evaluating these proposals a clear distinction is made between the Government’s role as a regulator and its commercial interests as owner of an industry participant. The appraisal of these proposals is a comprehensive one involving the following:
1. Appraisal of the Rehabilitation scheme prepared by the Operating Agency appointed by the Board of Industrial and Financial Restructuring.
2. Analysis of the stock returns-PE ratios, PB ratios and PCF ratios for the PSUs vis-avis private sector competitors, where the proposal is for conversion of equity into debt in order to improve returns to private stockholders.
3. Bench marking the performance of the company vis-a-vis its peers from the private sector and public sector.
4. Audit of the financial model prepared by the PSU.
5. Preparation of detailed financial model containing projections and sensitivities.
6. Detailed analysis of the financials of the PSU, especially its operating costs. The Controller General of Accounts presents a detailed analytical review of Union Government Accounts to the Finance Minister every month.
The review covers major aspects of receipts, expenditure, fiscal deficit, sources of financing to facilitate decision making at the highest level. In addition, accounting data is also supplied to Central Statistical Organisation, Reserve Bank of India and other agencies. A provisional Account (un -audited) for the year is also prepared at the end of the financial year.
The Controller General of Accounts also brings out every year, a booklet entitled ‘Accounts at a Glance’ bringing out broad and significant features of Government Receipts and Expenditure.
Role of CAG as Auditor
As an auditor of the transactions and accounts of the Central and State Governments, CAG acts as the watchdog and conscience keeper of the nation. The results of the audit serve the twin purpose of enforcing accountability of the executive to the legislature and providing an independent and informed critique of the administrative practices and implementation of the developmental schemes and programmes. The report of CAG on telecommunication sector highlighted instances misdemeanors at the highest level of the government. The report on defence services similarly brought-out-cases of huge wastage of public fund either due to defective planning or improper financial management. The report on the accounts of the Union Government highlighted the alarming public debt scenario. The report on direct and indirect taxes revealed the impropriety of the highest levels in the Revenue department in interfering with assessment proceedings and the failure to detect the massive evasion of taxes, both in respect of Income Tax and the Central Excise and Customs Duty. In the states also innumerable instances of mismanagement, wastage, inadequate financial control and other serious cases of bad governance have been brought to light by CAG.