Dr. A.K. Banerjee* & S.S. Dadhe*
SAI -
India
* Dr. A.K. Banerjee is currently Director of National Academy of Audit &
Accounts, Shimla, India.
**
S.S. Dadhe is currently Deputy Secretary to Government of India, Department of
Chemicals, New Delhi.
The winds of economic liberalisation are now blowing in most of the developing countries removing the shackles and spurring their economies into growth mode. Processes are taking place for restructuring economies, reducing Government budgetary deficits, deregulating commodity and financial markets and allowing market forces to determine real interest rates. These economic reforms have thrown government activities into a flux. The role of the government has changed dramatically with the deregulation of the economy and its move towards a laissez faire regime. The changed role of government calls for urgent changes in the approach of the government auditors. This paper seeks to analyse these and some associated issues.
The urge in the human mind for economic freedorn has led to gradual reduction of the earlier interventionist role of the government through initiation of measures or policies aimed at reducing the number of government controls relating to finance, industry, trade and agriculture policies etc. However, it needs to be acknowledged that even in the scenario of economic liberalisation, the State will retain the very important function of oversight. State intervention would also be necessary for providing essential services and on socio-economic considerations like redistribution of income, influencing the consumption pattern, protecting a nation's security, funding the 'learning cost' necessary to provide technology input which is either unproven or has a long gestation period and where the private sector is unwilling to foot the bill etc.
Traditionally audit in its post investment appraisal has been looking at the following issues:
The economic liberalisation measures and the consequent shift in the role of the Government from regulation of the economy through various controls to being a catalytic and monitoring agent has made the task of Government auditors highly complex and challenging. Reliance on the aforementioned traditional approach alone for investment appraisal or transaction based audit is not likely to prove very useful in this environment. Even the concepts of VFM audit would need certain reorientation before these can be effectively applied to the changing economic scenario. Some major issues, which appear to be of vital concern to audit, are discussed below.
In various countries the Supreme Audit institutions (SAI) are envisaged as safeguards against misfeasance and malfeasance. Their integrity, professionalism, and impartiality are perceived by the citizens to be of the highest order. The citizens today expect the SAI to enforce accountability of officials in respect of all decisions, which have a bearing on the interests of citizens. This cannot happen unless all instruments of State like commercial banks, non-banking financial institutions, co-operatives, panchayats etc. are brought within the ambit of SAI's audit. These institutions are playing vital roles in the country's economic development. These receive vast amounts of public funds and finance various projects in different sectors of the economy. It is, therefore, necessary to seriously consider appropriate reorientation of the mandate of SAI for bringing these institutions under the ambit of its audit, which would be in tune with the expectations of the citizens of the nation.
Disinvestment of the government holdings in public sector companies for raising finances and also reducing budgetary support to public sector enterprises, has become the buzzword for economic liberalisation. Such disinvestment is likely to decrease the number of government companies. New alliances and collaborations may also emerge which may alter the shareholding patterns of such companies. A small percentage change in government shareholding may exclude a company from the SAI's audit jurisdiction altogether even though investment of substantial amounts of public money in these companies may continue. It needs to be considered how, in such an event; the returns from the substantial amounts of public money that still remain invested in such companies can be brought under audit scrutiny. This aspect would need careful thought as such changes in government holding may, if left completely unmonitored, result in accountability to the legislature for the large amount of public funds invested, being given up. The norms for audit scrutiny by the SAI may have to be redefined in this background.
With the progress of economic reforms, the tax structure in a country may also undergo changes. There may be simplification of various rules and grant or elimination of certain exemptions and deductions etc. These are likely to have an impact on the raising of resources necessary to sustain the expenditure in social sectors. Suitable audit techniques will have to be evolved to determine whether grant or withdrawal of exemptions has achieved the desired objective and also the extent of accuracy of the methods used for forecasting of the tax base etc.
The process of economic reforms has already led to the creation of regulatory authorities in different sectors. While these regulatory authorities may not be spending substantial public funds themselves, their decisions may involve arbitration between suppliers and consumers, setting of appropriate quality assurance and pricing mechanism etc., and may have far reaching impact on investments in important sectors of the economy and the returns from them. As the performance of these regulatory authorities will have an important effect on the economy and will also determine the credibility of the nation in the eyes of the world, it is desirable that their audit is invariably assigned to the SAI.
Audit of a regulatory authority is, however, distinct from the usual forms of audit regularity, propriety or even value for money. This would require appropriate strengthening of the SAI's mandate. Similarly, there may be bodies (like the Board of Industrial and Financial Reconstruction in India) who have powers of arbitration and issuing mandatory orders which affect commercial decisions of public enterprises. The decisions of such bodies may involve financial burden on the government. These decisions should, therefore, be evaluated in national interest by a professional, objective and impartial institution like the SAI. However, traditional methods of evaluation may not suffice and new performance measurement mandate as well as criteria would require to be evolved by government audit.
In order to accelerate economic growth, the governments of many developing countries have created organisations to facilitate and promote investments in various sectors of the economy of the nation. In India authorities like Foreign Investment Promotion Board (FIPB), India Development Forum (IDF) etc have been set-up. Certain schemes like Export Promotion Capital Goods Scheme (EPCG) have also been formulated. The government have also guaranteed (e.g. through power purchase agreements) the commitments made by certain domestic enterprises to foreign collaborators. All these involve a potential negative burden on the public finances if the intended purposes are not achieved.
While these individual organisations and schemes may be within the audit purview of the SAI, the data required to evaluate their performance may not be furnished to it automatically. In fact, for evaluating the performance of these organisations schemes and guarantees, it would be necessary to evaluate the actual performance of many other organisations, which are either connected with or expect to benefit from them. Further, such evaluation would require scrutiny and analysis of a large number of databases, which would have to be tested for reliability and statistical integrity of data. This will require acquaintance of the auditor with statistical techniques and using them for the purpose of audit. The question of empowering the SAI to audit the accounts of beneficiaries of Government help as well as all records (including those with the organisations, which may be outside the ambit of SAI's audit), which are necessary for checking the validity of assumptions involved in any guarantee, may also have to be considered.
The scope of social audit in the post liberalisation scenario will be vastly enhanced. However, there would be certain problems in auditing the programmes, as these would mostly be implemented through private bodies, non-governmental organisations etc. who may not be within the audit jurisdiction of the SAI. It may not be enough to merely rely on utilisation certificates received from the implementing agencies, which is the present practice in India. To assess the social performance of different activities implemented through private bodies/non governmental organisations it will be necessary to evolve suitable audit indices and norms of disclosure. The SAI should also have access to the accounts maintained by non-governmental agencies in respect of public funds spent by them, as is the case in many other countries. Ways, including amendment of the mandate of the SAI to ensure that any body/authority receiving government assistance exceeding a specified amount must make its accounts open to its scrutiny, would have to be considered to get over this handicap. Certain non-financial but sensitive issues are also likely to arise. For instance, in India many State Governments have appointed Lok Ayuktas for investigating cases of alleged corruption of persons holding public office. Efficient functioning of Lok Ayuktas would have great impact on the economy. Their functioning should, therefore, be subject to evaluation by SAI's audit. The criteria for evaluating their functioning will have to be evolved after careful thought.
With the increased tapping of both national and international markets to raise funds for different activities, it will be necessary for audit to closely examine the cost of borrowing keeping in view the objective and the debt service obligations. It would be necessary to ensure that the liberalization measures do not push the nation into a debt trap a phenomenon witnessed in some countries. The developing countries have to use the funds obtained to create productive assets and utilise them for economic progress. They can ill afford to uitilise such funds in the pursuit of consumerism. The manner in which this should be analysed and highlighted by the SAI would need considerable thought.
Traditionally, government audit has refrained from commenting on government policy. However, in the emerging economic scenario, the citizens of a country would naturally expect an impartial authority like the SAI to objectively examine whether the government had considered all alternatives and available information before taking a decision with far reaching economic implications. This is currently being done to some extent by the Supreme Audit Institution of Israel. For instance, in his special report of December 1990 on 'Management of water resources in Israel', the State Comptroller of Israel had recommended doing away with subsidies so that there was no gap between the price of water to agriculture and its cost. This is a comment on a major policy issue. In this report, the State Comptroller had, inter alia, stated "Raising prices is necessary not only as an incentive for water economy, but mainly for putting an end to the serious distortions which subsidies cause, and to enable the agricultural sector to plan the composition, extent and location of its crop growing in accordance with hydrological realities and the interests of the national economy". He had also recommended, "In managing a natural resource, such as water or land, conflicting aims of various sectors in need of the resource are created. Therefore, an overall national policy is required which does not incline towards a certain sector, but which has a comprehensive view of the future needs of the state and society. For the purpose of putting the water sector in order, the responsibility for its management should be transferred to a state body, professional and unbiased, which will take into consideration the needs of the national economy, including those of the agricultural sector, and that will ensure the quality of drinking water for households and the orderly and reliable supply of water in the future'. Such recommendations can result only from an effective policy audit. This would appear to be indicated in the interest of ensuring accountability for investment of public funds and also for minimising the risk of draining of public resources due to adoption of sub-optimal policies. The dilemma would be to determine appropriate methods for evaluating all the social costs and benefits associated with a policy decision. This area would be quite sensitive and audit would have to tread carefully. To begin with, audit could evolve methods for examination of the procedures, reliability of databases and validity of assumptions in the options considered by the executive while arriving at a policy decision. This procedure would also be in consonance with the recommendation contained in the auditing standards issued by the International Organisation of Supreme Audit Institutions (INTOSAI).
Transparency of actions taken by the executives greatly aids accountability. Often the auditee organisations show considerable reluctance to produce the documents requisitioned by audit on the grounds of confidentiality. Such reluctance is markedly pronounced in respect of expenditure relating to defence, internal security, secret service fund etc. Government also often takes the view that providing records relating to certain expenditure or revealing the objectives thereof to audit may be prejudicial to the interests of the State. Further, a view is also often expressed by the auditee organisations that the audit of SAI should be confined only to accounts. This view is not tenable especially in the emerging economic scenario where certain decisions may have to be examined by audit not in terms of any immediate financial outgo but their overall impact over a longer term. Steps may, therefore, have to be considered for ensuring unquestioning production of any document or information asked for by the SAI and his representatives, Of course, an auditee organisation could make a request specifying the supervisory level of auditors who alone in their view should have access to certain sensitive/confidential documents. They can also make a request to the SAI to refrain from making a public comment in its report on a matter considered to be sensitive by them. However, the final decision thereon should rest solely with the SAI. A cue could possibly be taken from the situation obtaining in Israel where the action to be taken in situations relating to safeguarding of the security and foreign relations of the State of Israel is formalised in Section 17 of the State Comptroller Law, 5718 -1958.
In order to respond to the changes brought about by economic reforms it is necessary that a fresh look be given to their impact on human resources. As the government functions relating to direct intervention in the economy shrink, officers and staff of the SAI may have to be retrained in such a manner that they understand the effects of important government decisions and acquire the capability to assess the macro economic impact of these decisions. Auditing of government policy or a regulatory body would also require acquisition of new skills. Even audit of the effectiveness of social services programmes would need considerable upgradation and reorientation of the methods and skills of the present generation of government auditors. Attention would need to be given to development of suitable indices for social audit. The modalities of planning and conducting of various audits, their supervision, staff norms, methods of training the staff etc. would have to be redefined completely.
Economic liberalisation and growth of information fuel each other. With the advent of personal computers and Internet, mind boggling quantity of information on every subject is virtually on tap. Such databases can be gainfully utilised both for decision making on investments as well as auditing. Further, the records of most auditee organisations would increasingly be on computer. In order to be able to access and query them for analysing any issue, the government auditor would have to be thoroughly familiar with the latest developments in the IT sector and the tools available. This, in turn, would require reorientation and retraining of the traditional government auditors at all levels.
In the future fast growing economic scenario the cost of a mistake to the nation will be enormous unless rectified in time. Changes in the existing statutes would require to be considered to make persons at various decision-making levels in the government accountable for not taking action on the recommendations of audit within a short and specified time frame. This seems an imperative necessity in the present situation when, as in India, even preliminary audit observations are often not attended to for years.
The nature and direction of economic reforms appear to have stabilized now in most of the developing countries. While the governments are reorganising themselves to achieve high growth in the years to come through these reforms, the SAIs must also gear themselves up to respond to the changing scenario in order to be truly able to fulfil the mandate given to them by their legislatures. Accountability of the executive can be enforced only if audit has the capability to assess the impact of the policy measures initiated and implemented by the former in proper perspective. This would require very careful thinking on the part of government auditors. In the interest of transparency in audit, it may be necessary to make major policy statements in the form of Public Auditing Standards as well as prepare detailed blueprints of the future action plan.