“Role of Audit in Policy Making”

A presentation by

Satish Loomba

Pr. Accountant General (Audit)

Himachal Pradesh

Overview

Audit Mandate

What is policy ?

PFM and Audit

Some Examples

Some issues for discussion

Audit Mandate

Article 148: CAG of India

Article 149 : Such duties and powers in relation to accounts of Union and States and other bodies and authorities as may be prescribed under law by Parliament. Accordingly DPC Act 1971

Article 150: Accounts of Union and States in such form as advised by CAG

Article 151: Audit Reports to President and Governor

...contd

Audit Mandate

DPC Act 1971

All receipts into Consolidated Fund

All expenditure from Consolidated Fund

All transactions with respect to Contingency Fund /Public Account

U/s 23 of DPC Act CAG authorized to make Audit regulations

Regulations on Audit and Accounts notified 2007

Within mandate CAG sole authority to decide scope and extent of Audit

In exercise of mandate: Financial, Compliance and Performance Audit.

What is Policy

Principle(s) to guide decisions for achieving desired outcomes.

Generally made by senior management

Policy Content

A statement of purpose

Scope and applicability

Date of effect

Responsibilities/governance/oversight structures

Specific regulations and requirements.

Policy Cycle

Agenda setting (Problem identification)

Policy formulation (consultation, analysis)

Adoption

Implementation

Evaluation

Role of Audit

Mandate unhindered: No conceptual constraints.

Main agency in facilitating parliamentary control over the executive

Provides feedback for accountability of the executive to the parliament.

PFM: Issues arising

To cope with limited funding and increasing expectations from citizens, new and creative solutions that make optimum utilization of resources to be found

Public sector needs to deserve the trust that goes with exacting standards of probity and accountability and demonstrable efficiency in the use of public resources

Critical analysis of revenues, consumption expenditure, savings, public debt, capital expenditure and returns therefrom, becomes not only the responsibility of administration, but also of Audit

Auditors do not work in isolation and meaningful interaction between them and the administrators and the managers of public sector undertakings & autonomous bodies and authorities is necessary

Role of Audit in PMF

INTOSAI Lima Declaration (1977)

“Concept of audit is inherent in public financial administration because

management of public funds represents a trust.

Audit is not an end in itself but an indispensable part of a regulatory

system whose aim is to ___ reveal deviations/ violations of the principles

of legality, efficiency, effectiveness ___early enough to make it possible to

take corrective action in individual cases, to make those accountable

accept responsibility, to obtain compensation, or to take steps to prevent--

or at least render more difficult--such breaches.”

In our country too ‘financial reporting and Analysis on the use of

resources’, is an integral part of a well functioning system of Public

Financial Management (PFM), and which concerns the Comptroller and

Auditor General (CAG) also.

Good Governance

When authority and institutions are Accountable Effective Efficient Transparent Responsive Equitable Inclusive

and follow the rule of law.

One man’s food is another man’s poison !

Reason still the best bet : so debate !

What Audit does not want to be !

Watch where you’re going !

Guns or butter ! Eternal economics !

Win some lose some !!

NEW WARS !

No coordination between Transport and Excise Departments Passenger and Goods Tax

New commercial vehicle registrable under HP Motor Vehicle Tax Act (with RLA/RTO) for Motor Vehicle Tax.

For Passenger and Goods tax, vehicles registrable with excise Department (AETC) under HPPG Tax Act.

Passenger and Goods tax registration based largely on compliance

No information flow between Transport and Excise authorities.

In 20 RTO/RLA units test checked 13314 commercial vehicles not found registered with AETC’s out of 47512 vehicles.

Calls for legislative/policy changes : govt. agrees.

VAT Ambiguity

ITC allowed to dealer for intra state purchase only.

No ITC allowed for inter state purchases

ITC available only in respect of actual sales out of local purchases only for the accounting period (matching principle).

No set formula- many interpretations from AA to AA

VAT return form deficient.

Royalty Rates on Forest Timber

Royalty rates determinable by P.C.

P.C. lowered rates for Remote area produce.

HP Forest Corporation itself determined Remote Area Classification.

Ultra vires/function of Government.

Huge loss of revenue.

Mechanism failure under Stamp and Registration Act.

NBFCs selling insurance in state.

No NBFC operating in Himachal Pradesh state purchased stamps from HP treasuries (Audit finding)

No data with Government.

Article 268 of Constitution provides such sale of stamps to be state revenue.

Govt. admitted.

Audit of Mashobra Resorts LimitedWildflower Hall

Audit of Mashobra Resorts Limited

A joint venture agreement was executed between the Govt of H.P. & East India Hotels Limited (EIH) on 13 October 1995

Objective of this JV was to reconstruct, set up/run the Five Star Deluxe Hotel Resort at the Wild Flower Hall, Chharabra

Project cost at the time of agreement was estimated to be about Rs. 40 crore of which Rs 20 crore was to come from equity and balance Rs 20 crore to be raised by JVC as loan

Subscription of the State Government was to the extent of Rs. 7.50 crore being the value of premises and East India Hotels contributed Rs.13 crore

Termination JVA by State Government ( 13th Oct 2001)

Company failed to make hotel fully commercially operational with in four years from the effective date and undue delays burdened the JV with escalation of more than 100 %

Company unauthorizedly changed the equity distribution ratio without the consent of the State Government in term of the JVA

paid/appropriated a large sum of money as payment to their associate Companies under the garb of Technical Assistance from them, even though those services were to be provided by the Company free of charge

Termination order of the State Government was challenged before the Company Law Board and the Company Law Board

Matter is still pending before the High Court of Himachal for final decision.

Traveler rating for Wildflower Hall, Mashobra

At trip advisor website (96% excellent or very good)

Excellent : 378 (87 %) Very good: 39 (09 %) Average : 14 (03 %) Poor: 3 Terrible: 2

http://www.tripadvisor.in/Hotel_Review-g1156032-d302153-Reviews-Wildflower_Hall_Shimla_in_the_Himalayas-Mashobra_Himachal_Pradesh.html

Entrustment of Audit of MRL to the C&AG

keeping in view the public interest involved state govt. requested office of the PAG(Au)H.P. on 26 February 2013 to conduct its audit

After receipt of request of the State Government under Section 20 (1) of the DPC Act 1971 this office informed the MD of the MRL about the audit on 26 April 2013

MRL has now challenged the entrustment of audit to this office in the High Court of Himachal (CWP no. 3282).

High Court vide its orders dated 27 May 2013 instructed this office not to proceed to conduct audit

Reply affidavit on behalf of the C&AG and this office has been submitted in the High Court on 9 July 2013 and next date of hearing is yet to be fixed.

HP Hydro Power Policy

National Energy Policy 2005 lays emphasis on full development of hydro potential

HP notified hydro power policy in December 2006 [PPP Mode]

20 Year period analyzed (1991-2012).

55 out of 560 projects operational [1805 out of 10131 MW]

No perspective plan, major flaws in Initial Agreements.

…contd

HP Hydro Power Policy

Limited in house capacity – critical functions out sourced [DOE problems]

No system for resolution of local issues. Laxity against IPPs. Negligence of environment. Employment policy flouted wantonly. Prescribed monitoring systems virtually non existent.

Slackness in Industrial Process

HP Industrial Policy 2004 seeks:

Promotion of industry based on local raw material.

Establishment of new industries in industrially backward areas.

Provision of employment to locals.

Protection of environment.

Audit findings negative: Review planned.

Levy of ED on sale of energy-Absence of provision (ED Act)

ED leviable and payable to Govt. on energy consumed (except Govt).

Act silent on levy of ED on sale of energy by generating companies to other states/PSUs

SJVN sold 18650 million units to other States/PSUs 2002-2007

Rs 391 crore of ED lost

Govt admitted ambiguity.

Amendment in 2009 (consumption or supply)

Production-sharing contract of the Krishna-Godavari (KG)D6 Basin gas field

RIL was reluctant to allow the CAG to access all its records and the ministry had veered around the view that the CAG should restrict its audit merely to the accounts related to the development of the field and not go into the operational aspects of the field

CAG has made it clear to the ministry that the performance audit of the production-sharing contract is covered under Section 16 of the CAG's (DPC) Act as profit from petroleum is a non-tax revenue credited to the consolidated fund of India, and such audit would involve examination of all records including those of the operator (RIL).

These restrictive conditions impinge upon the basic mandate, rights and obligations of the CAG to conduct as well as report the results of audit to Parliament under the CAG’s [DPC] Act as well as the Constitution of India

CAG is not a 'munim', can look into efficient use of resources: SC

“The CAG shouldn't be just preparing balance sheet of government accounts. It is the duty of the CAG to look into efficient use of resources“

“CAG is a constitutional authority entitled to review and conduct performance audit on revenue allocations relating to the Centre, the states and the Union territories”

“if the CAG has exceeded its brief then it's for Parliament to take a call”

CAG Report : Not a final word on an issue

CAG report commands respect and cannot be brushed aside but

the auditor's findings cannot be gospel truth as it is subject to scrutiny by Parliament

Supreme court’s remarks on coal block allocation and 2G spectrum allocations

Latest developments

SC judgement dated 17th April, 2014

Ambit of audit by CAG to cover all issues that are required to be examined by the Parliament, in context of public funds.

When Nation’s wealth/natural resources are being dealt with by Union, State or its instrumentalities, even private parties like service providers, they are accountable to the people and the Parliament.

Essence

Duties and powers of CAG, being part of basic structure of Constitution, are to be interpreted & carried out to meet the changing needs and requirements of accountability.

Purpose

Providing an independent assurance that the terms and conditions of the agreements( with private sector) have been complied with in letter & spirit.

Assisting in protecting legitimate interest of public at large.

Ensuring Parliamentary oversight.

Thank you.