In developing countries progress is synonymous with Construction of social and communication infrastructure such as roads, schools, hospitals, water supply projects and other schemes for public welfare. Accordingly a major chunk of the development funds is funneled into public works, to cater for the basic needs of the population. Still the needs far exceed the resources and the development projects have to be prioritized in a way so as to yield maximum benefit to the people in the most vital areas. This brings into focus the concept of cost, which is the single most important determinant of development priorities. The benefits accruing from a project have to be assessed on the basis of both the immediate and long-term costs to be incurred. The importance of cost controls in the works sector and their subsequent audit cannot be over estimated. A cost accounting system should take into account not only the financial aspect but also the economic, environmental, social and opportunity dimensions of the costs. However in most countries it is the financial cost of a project, which serves as the basis of decision making while considering various alternatives in implementing the development agenda of the government.
Developing countries are making a substantial investment in construction of physical infrastructure. The results of such efforts largely depend upon the level of cost consciousness among the public managers responsible for the execution of public works. This is because they are directly or indirectly involved in decision making regarding investment options and the manner of implementation. A conscientious public manager can always ensure maximum benefit to the nation by committing minimum resources through prudent and cost effective selection of a particular project among so many choices and by ensuring its speedy implementation in accordance with the envisaged framework of objectives.
Cost is defined as a sacrifice of resources. What ever we acquire we have to sacrifice some resources in terms of money, time and other inputs. In the commercial sector measurement of costs is easier as virtually every cost can be attributed either to the product itself or to the overheads called period costs, finally merging the two in the costs of goods sold. In the public sector with its large unwieldy structure it is more complicated to identify and attribute costs to various processes and get a clear picture as to how much is being spent on the provision of a specific service and whether there can be a better and cheaper alternative. Cost controls in public sector do not have the same primacy as in the private sector. In private sector the costs of alternatives have to be carefully evaluated with a view to gain a competitive advantage over the rivals. In the public sector they are just one parameter of decision making in so far as the selection of the projects is concerned. There are other considerations like governmental policies, donor priorities and public sensitivities. More over a public manager who is not directly connected with the costs and consequences of his decisions does not feel the same concern as a private entrepreneur who stands to gain or lose directly from a cost oriented decision.
In this paper, an attempt has been made to give an overview of the cost control mechanisms and how they are audited. An attempt has also been made to identify certain issues affecting the efficacy of cost controls and how to resolve them.
A schedule of rates is the basic and standard document for assigning costs to various inputs in a public works project. It is a voluminous document specifying detailed rates for virtually all items and processes of involved in a project. The range of possible variations under one item or process caused by various situational variables is also taken into account and separate rates are given for each set of factors. For instance rate of carriage of different materials in different terrains are different. While calculating these rates an attempt is made to safeguard the interest of both the government and the contractor. The schedule of rates is made up to date in accordance with the changes in market prices at different intervals. In between, the contract awarding authorities are authorized to allow premium to the contractor on the scheduled rates to bring them at par with the market rates. Such a premium is fixed in the light of the increase in price index in that particular item. Rates for non-scheduled items are fixed after a market survey.
A set of criteria including, NPV, IRR, EIRR are applied to assess the feasibility and the rates of capital return of the project. However the priorities in this regard are set by the government and sometimes the donors. At times governmental preference for a particular sector or area are based on various social and political considerations or keenness of the donors for a specific activity which might get precedence over the usual criteria of feasibility assessment.
Initial estimates are prepared usually by the line departments, which are thoroughly vetted by the planning and finance ministries before their incorporation in the budget proposals to be laid before the Parliament. Once the budget is passed and the administrative sanction is given action by the competent authority, detailed estimates containing a bill of quantities and drawings is prepared at this stage. It is examined and thoroughly evaluated by the competent authority before issue of technical sanction.
The project budget is based on the bill of quantities (BOQ). The contract amount can exceed the technical sanction by a certain amount, which is fixed. Any subsequent increase in the scope of work resulting in extra cost has to be authorized by an official next above the tendering authority. There are budgetary Controls to ensure that the planned expenditure for various inputs in a project does not exceed the limit nor it is underutilized. Requirements to obtain sanctions for every item of expenditure from the competent authority and preconditions for re-appropriating expenditure from one head of account to another places curbs on the project manager's possible designs to manipulate or over spend public funds. Adherence to budgetary requirements is watched at various levels by the administrative heads of the line departments as well as the planning and finance ministries. Wherever an excess expenditure is inevitable, supplementary budgets grant and a revised sanction is issued.
In order to ensure competitive bidding, tenders are invited through the press from the interested contractors. All tenders are invited through a sealed public tendering system in order to promote competition and avoid collusion between the contractors. There are three kinds of tenders, viz. lump sum, schedule of rates and a combination of the two. All tenders are checked and evaluated before the award of contract. After the rates have been approved by the competent authority, the work is awarded to the contracting firm on the basis of the lowest bid. An agreement between the department and the contractor is then executed.
The system of procurement of goods is also geared to ensure the requirements of competitive bidding. A centralized directorate usually looks after the procurement work. Purchase committees are also constituted for procurement of materials up to a certain amount. There are elaborate procedures specifying financial powers of each individual or committee entrusted with procurement work.
A system of cost accounting, records measures and reports information regarding costs for the purpose of decision making as well as performance evaluation of the managers. Costs are represented in the accounting system by outlays of cash, promises to pay cash in the future and the expiration of the values of an asset. It provides data for both managerial and financial accounting. Thus the cost accounting system in the works sector should give information about the cost being incurred on the provision of services they are catering for. As such there is no elaborate system of cost accounting in the works sector, although some cost related data can be extracted from these accounts. The basic accounting records include cash book, register of works, contractor's ledger, schedule of deposits, schedule of miscellaneous advances, stock register etc. There is no cash flow accounting and the system is mainly geared to maintain a record of payments made against different projects later on to be incorporated in the appropriation accounts. Such a system of accounting does not give clear information on the nature and cost of inputs and outputs like a true cost accounting system. Primary components of a cost accounting system such as cash flow accounting, job costing, process costing, perpetual and periodic inventories etc. are missing.
Auditing of Project Expenditure
In conventional audit, a sample of transactions is analyzed with reference to the canons of regularity and propriety. In certification audit the strength of internal controls and the overall soundness of its accounting system is commented upon.
In performance audit the working of management with regard to economy, efficiency and effectiveness is verified.
In course of the contract and bidding procedures, auditor moves step by step to see if the project has cleared all the formalities and procedures. Fulfillment of the following essential requirements is verified -
Some of the potential irregularities noticed in the above areas are :
Audit of bidding procedure and contracts is followed by the audit of implementation phase of the project. It involves a close scrutiny of a sample of transactions taking place in the project construction office as well as their correct classification and recording in the accounts books maintained in the project office. In performance of their functions the auditors ascertain :
Audit observations
Generally, the audit observations fall in the following categories
Wasteful expenditure: Expenditure was regular and within the budgetary sanctions but was avoidable.
In addition to the above the auditors also comment on the soundness of internal controls including the administrative, budgetary, financial, and accounting controls in the organization. The comments specify if the controls were in place and being properly utilized to detect frauds and irregularities. Specific instances of violation of internal controls as well as the irregularities occurring due to the lack of the internal control system are also highlighted.
When the final bill is audited it is ensured that all the outstanding claims against the contractor have been settled and recoveries if any have been effected and the work has been completed satisfactorily by him. Moreover it is ensured that the expenditure account pertaining to the work has been closed and no further entries on behalf of that work are recorded.
Audit also responds to any information appearing in the press or conveyed in any other audit to look into the accounts and report accordingly.
Role of SAI's in auditing project costs
Pakistan is a democracy with a bicameral legislature. The Government is responsible to the Parliament. The Auditor-General of Pakistan is empowered to conduct the audit of the accounts of the federal and provincial governments as well as all other corporations, authorities and agencies constituted by the federation or the provincial governments. The annual audit reports commenting upon the regularity, propriety, economy, efficiency and effectiveness in, government expenditure at federal and provincial levels are laid before the respective legislatures. On behalf of these legislatures, the Public Accounts Committees (PAC) comprising of elected public representatives examine the accounts and in the light of audit findings issue directives which could either be disciplinary action against the officials at fault or recoveries of the overpaid amounts or both. The PACs have no executive powers but can direct the executive to take appropriate measures. The compliance of PAC directives is watched by its secretariat.
Audit plays a significant role in promoting cost consciousness in the Works Departments. As a result of audit significant amounts are recovered. The figures of one audit office are given below as illustration
| YEAR | Amount pointed out (Rs millions) |
Amount recovered (Rs millions) |
| 1994-95 | 2372.041 | 70.641 |
| 1995-96 | 1416.593 | 77.684 |
| 1996-97 | 5023.924 | 203.676 |
| 1997-98 | 4303.261 | 124.166 |
While most SAls have increasingly come to practice value for money audit ranging over economy, efficiency and effectiveness of expenditure, it needs to be recognized that far greater economy can be secured through efficient and economical project design which will reduce costs and meet the user's requirements.
SAls also need to give greater attention to cost recovery and charges for supply and services rendered. These are frequently determined on extra financial considerations and involve subsidy or transfer of resources between different sections of the population of a country. But when resources are scarce and subsidy transfers lead to inefficiencies and even wasteful use of services, SAls may have to look into and comment on the adequacy of charges for supply and services rendered.
Being the major agency executing public works projects, these agencies need effective cost control mechanisms. Such controls should encompass all types of costs the society is likely to pay in terms of a particular project. Cost data should play a pivotal part in decision making regarding selection of a project among many options and the strategy for its implementation. Audit of public works projects should be geared towards promoting cost consciousness in the system of public works. In Pakistan, the accounting system in the public works departments mainly aims at keeping a record of financial transactions of a particular project, which are then consolidated to give the overall expenditure against the budget allocated to the public works sector at national level. Although some cost data can be extracted out of such accounting information, yet the system falls far short of an elaborate cost accounting system. Audit on its part tries to point out the financial as well as economic losses caused due to lack of internal cost controls and aims at retrieving as much of that as possible.