ADVERTISEMENTS:
After reading this article you will learn about the parliamentary control over finances – Accounting and Audit.
It is not enough that Parliament must grant the money to the executive for expenditure and vote the taxes, it has also to see that the appropriations for funds are spent on the items approved in a wise and economical manner. Further, it has also to see that the taxes voted by it are collected by the executive diligently and honestly.
If expenditure is made recklessly and the money does not flow into the public exchequer, the result would be disastrous for the country. It is, therefore, essential that all scheduled receipts are credited and all issues are duly authorized. To ensure proper expenditure and receipts the Parliament provides for accounting and audit. Besides, it also sets up its committees to review the Budget execution.
In India for the purposes of accounting and audit the office of Comptroller and Auditor-General has been set up. The parliament has also set up the Public Accounts Committee, the Estimates Committee and the Committee on Public Undertakings. In this chapter we shall take up Accounting and Audit.
Accounting:
What is Accounting?
Accounting has been defined as the “art of recording, classifying and summarizing transactions, wholly or in part of a financial nature in terms of money and interpreting the results thereof.” In simple words, it means keeping a systematic record of financial transactions. Francis Oakey defines accounting as “the service of producing promptly and presenting clearly the facts relating to financial condition and operations that are required as a basis of management.” Accounting means maintaining a proper record of the finances of the organisation. It has a dual function to perform.
(a) First is the determination of the fidelity of all officers who handle the fund,
(b) Second is the furnishing of information needed regarding financial condition of and operations for policy determining and administrative purposes.
In the words of Dr. L.D. White, “The primary functions of a system of amounts are to make a financial record, to protect those handling funds, to remove 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 making of an audit.”
ADVERTISEMENTS:
Accounting is an indispensable means of exercise of financial control. Without accounts it is impossible to know how much was received, or how much was spent and for what purpose. Only through systematic accounting can the honesty and legality of transactions be determined.
Scientific budget preparation would be impossible without accounts being available for the past years. Through accounts the authorities can know whether a particular activity or programme is self-supporting or involves a burden on the public exchequer, and if the latter, whether it should be continued or expanded or not.
Essentials for Public Accounting:
The form of public or Governmental accounting differs from that of business and commercial accounts, because the objects of the two are different. Business and commercial accounts are so kept as to facilitate the preparation of balance sheet, showing profit or loss, assets and liabilities.
On the other hand, the purpose of Governmental accounting is to furnish data to show whether the provisions of the budget as voted by the legislature have been observed or not. Hence the essentials of public accounting are different from those of private accounting.
ADVERTISEMENTS:
These are as follows:
(i) Centralization of Accounts:
One officer should be made responsible for keeping the accounts of all the agencies of the Government. This will give a co-ordinated and unified picture of all the expenditure and income of the Government.
(ii) Double-entry Book-Keeping:
The Government accounts should be maintained on a double-entry basis which means that 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.
(iii) Classification of Funds:
Assets, liabilities and proprietorship of every fund or group of funds should stand out as a separate balanced group of accounts. A complete balance sheet should be compiled for every fund.
(iv) Revenue Accounting:
In the Accounts reports all items of a non-revenue character should be excluded from reports of revenue. Revenues should be classified by fund and by source.
(v) Budgetary Control Accounts:
The Government accounts should follow the budgetary form, i.e. they should be kept under the same heads and sub-heads as those of the budget.
Accounting in India:
Generally speaking, accounting is an executive function and is therefore usually vested in the executive departments of the Government. In Britain the Head of each department is nominated as the accounting officer in respect of his department, and each department keeps its own accounts.
But, in India, accounting has not been made the responsibility of the executive. It is vested in separate department known as the Accounts and Audit Department headed by the Comptroller and Auditor-General of India whose office is a creation of the Constitution and who is dependent of the executive control.
To assist the Comptroller and Auditor-General there is in each State an Accountant-General in whose office the accounts of the transaction (Union as well as State) taking place within the territorial limits of that State are kept. It may be, however noted that A.G’s office does not maintain the accounts of the Railway and Defence departments. These are maintained by the Financial Commissioner for Railways and the Military Accountant-General respectively.
1. Initial Entry:
The basic unit of accounting in India is the treasury. In each District, there is a Government treasury under the charge of a Treasury officer. The treasury is maintained at the cost of the State Government, but it keeps the accounts of the Central as well as State Governments.
Where there are branches of the Reserve Bank or the State Bank of India, they perform the cash duties of the Government. Every financial transaction, revenue and expenditure is recorded in the treasury. On the 11th and 1st of each month, the Treasury Officer sends a list of payments made during these intervals, supported by vouchers to the A.G.
2. Classification of Accounts by the A.G.:
All accounts of the previous months reach the A.G.’s office by the 1st of the next month. This office classifies these accounts, i.e., marks each item of receipt of payment according to the head of the account. There are four different accounts, i.e., revenue accounts, capital accounts, debt accounts and remittances.
Each one of these accounts is divided into major heads which constitute the main units of classification. The major heads are further sub-divided into minor heads which in turn are further divided into detailed heads.
3. Compilation:
The next stage in accounting is compilation. Before compilation, the accounts are audited by the auditor. Then they go to the Accounts Officer who compiles them every month and submits them to the Government concerned by the end of the following month.
4. Annual Compilation:
Lastly comes the annual compilation of all the accounts of the Government. This is done by the Auditor-General of India. He submits the Finance Accounts Appropriation Accounts and his Audit Reports to the President or the Governor, as the case may be, sometime in January or February of the following year.
These Reports are laid before the Parliament or the legislature, as the case may be at the time of Budget session.
Audit:
Audit is one of the most important instruments of Parliamentary control over the finances of the country. It is a means of enforcing accountability and is a part of the external control over administration maintained by the Legislature.
Audit, in simple words, means the examination of accounts with a view to determining their correctness and of the transactions they “undertake to quickly know everything and understand the profit and loss.”
According to James C. Charles worth, “Audit means the process of ascertaining whether the administration has spent or is spending its funds in accordance with the terms of the legislative instrument which appropriated the money.”
It 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.”
“An audit is an examination and verification of the accounts after transactions are completed in order to discover and report to the legislative body any unauthorized, illegal or irregular expenditures, any financial practices that are unsound, and whether the administration has faithfully discharged its responsibility.”
Audit as a system of Legislative control over public finance first arose in England and it was more the result of a gradual process than a creation. In the first place, Parliament insisted during the reign of King John that they should have the control of receipts and revenues and the discretion with regard to expenditure was considered to be a prerogative of the Crown.
But the Stuart autocracy made the Parliamentarians more exacting and they began to claim a share in the control of public expenditure as well.
As more and more powers passed from the hands of the king to Parliament, gradually the present practice was established which gave the Parliament complete control over expenditure also.
The audit system was established in England under the Exchequer and Audit Department Act of 1866. This Act inter alia provided for the establishment of the office of the Comptroller and Auditor-General.
Formerly audit was conducted only in case of expenditure and that only to ensure that money had been spent in accordance with the appropriation grants.
But at present it is conducted for all financial transactions, whether for receipt or payment to ensure that money which has been collected and expended is in accordance with the provisions of the Appropriation Act passed by the legislature and that there is no fraud or embezzlement.
The present audit goes a step further also, to examination of the ‘faithfulness, wisdom and economy’ applied by the official in making the expenditure. It is no longer sufficient that appropriations should be applied to purposes approved and should not be exceeded without parliamentary approval. It is more important that those should be wisely and economically expended and that extravagance and waste be avoided.
In the words of an American writer “The main objective of audit is to fix the accountability of the officers of the Government for an illegal, improper or incorrect payment made resulting from any false, inaccurate or misleading certification made by them as well as for any payment prohibited by law or which did not represent a legal obligation under the appropriation or fund involved.”
Objects of Audit:
The main objects of Government audit are to ensure:
1. That there is provision of funds for the expenditure duly authorized by competent authority.
2. That the expenditure is in accordance with a sanction properly accorded and is incurred by an officer competent to incur it;
3. That payment has, as a fact, been made and has been made to the proper person, and that it has been so acknowledged and recorded that a second claim against Government on the same account is impossible;
4. That the charge is correctly classified, and that (as in the case of Public Works and Forest accounts) if a charge is debatable to the personal account of a contractor, employee or other individual, or is recoverable from him under any rule or order, it is recorded as such in a prescribed account;
5. That in the case of audit of receipts:
(i) Sums due are regularly recovered and checked against demand and
(ii) Sums received are duly brought to credit in accounts;
6. that in the case of audit of stores and stock, where a priced account is maintained, stores are priced with reasonable accuracy, and that the rates initially fixed are reviewed from time to time, correlated with market rates and revised when necessary;
7. That the articles are counted periodically and otherwise examined for verification of the accuracy of the quantity balances in the books and that the total of the valued account tallies with the outstanding amount in the general accounts and that the numerical balance of stock materials is reconcilable with the total of value balance in the account at the rate applicable to the various classes of stores; and
8. That expenditure conforms to the following general principles which have for long been recognized as standards of financial propriety, namely:
(a) That the expenditure is not prima facie more than the occasion demands, and that every Government servant exercises the same vigilance in respect of expenditure incurred from public moneys as a person of ordinary prudence would exercise in respect of expenditure of his own money;
(b) That no authority exercises its powers of sanctioning expenditure to pass an order which will be directly or indirectly to its own advantage;
(c) That public moneys are not utilized for the benefit of a particular person or section of the community;
(d) That the amount of allowances such as travelling allowance granted to meet expenditure of a particular type is so regulated that the allowances are not on the whole sources of profit to the recipients.
Types of Audit:
Audit has been classified as Audit of Appropriation, Audit of Accountancy, Audit of Authority and Audit of Propriety.
(i) Audit of Appropriation:
Audit of Appropriation is the most important part of audit system. Its function is to see that the amounts authorized by the legislature are utilized for the purposes for which they were sanctioned.
(ii) Audit of Accounts:
Audit of Accounts is to see that the final accounts give a complete picture of the financial transactions. It is to see that no frauds or technical errors have been committed in the accounts. The expenditure has been shown under proper heads and sub-heads along with vouchers.
(iii) Audit of Authority:
Audit of Authority is to ensure that those who incurred the expenditure had the requisite authority.
(iv) Audit of Propriety:
Audit of Propriety is to detect cases of extravagance and waste even when the expenditure was legal and authorized. In short, public money should be spent as one spends personal money i.e. prudently, wisely and economically.
Features of Audit:
Audit of Government accounts in India is a Union subject.
The main features of the Indian audit system are as follows:
(i) Indian Audit is Governed Not by Law, But by an Executive Order:
The Government of India Audit and Accounts Order 1936 is adopted under the Indian (Provisional Constitution) Order of 1947. In Britain there is statutory provision for audit under the Exchequer and Audit Act 1921, and so also in the U.S.A. under the Budget and Accounting Act 1921.
(ii) The Audit is mostly Limited to the Expenditure Side Only:
Its concern with receipts is limited to those items only which it may be required by the executive to undertake, or may undertake with its approval.
(iii) Indian Audit is Primarily a Legality Audit:
It does not usually go into the question of merits of expenditure. However, it is not precluded from investigating into or commenting upon the impropriety, wastefulness or extravagance of expenditure where there is a prima facie case for doing it.
(iv) The Audit is Conducted on Behalf of the Executive:
The audit is conducted on behalf of the executive and audit reports are submitted to the executive.
(v) Combination of Accounting and Auditing Functions:
Though the office of the Comptroller and Auditor-General of India is organised on the British model, yet there is one substantial difference between the two. In England the Comptroller and Auditor-General is not concerned with the accounts but deals only with the audit.
But in India, audit and accounts have been organised under one and the same service called Indian Audit and Accounts Service and, therefore, the personnel of this department are concerned with accounts as well as audit. However, audit and accounts have since been separated (March 1976).
(vi) Centralization of Audit and Accounts Services:
Indian audit and accounts system is also a centralized feature which means that there are no separate Audit and Accounts Services for the Union Government and the State Governments as they are generally in a country with a federal constitution. In Indian federation there is one single agency in the form of Auditor-General.
As the head of Audit and Accounts administration, he exercises control over public finance hot only of the Union Government but also of the State Governments. He is, however, assisted in his functions by Accountants-General in the States. There is an Accountant-General for the Central Civil Departments except for the Railway Ministry which has its own Accounting Officer and one each in the State Governments.
The Accountants-General maintains all Government Accounts in their own spheres. The general rules and forms are provided by the Auditor-General of India. This system of centralization has both its advantages and disadvantages.
The uniformity of accounts throughout the country, consequential facility in auditing, fairness and purity of accounts and the fact that the personnel of this Department belong to a central service and they, being under independent Auditor-General, enjoy sufficient freedom from the control of the executive, are some of its advantages.
Too much concentration of power in the single head of a Department, pressure of work, jurisdiction over whole of the country are, however, some of its disadvantages.
Organisation of Audit in India:
The power of accounting and audit is vested in the Indian Audit and Accounts Department which is headed by the Comptroller and Auditor-General of India. The office of the Comptroller and Auditor-General came into being in 1919, when the first Auditor-General of India was appointed by the Secretary of State under Montagu-Chelmsford Reforms Act.
We have borrowed this from England where it was established under the designation of “Comptroller-General of Receipts and Issue of His Majesty’s Exchequer.” Auditor-General in India was then made responsible to the Secretary of State and held office during His Majesty’s pleasure.
He was thus made independent of the Government of India whose accounts he had to audit. The Government of India Act, 1935 gave him a constitutional recognition. Our new Constitution also, under Article 148, makes provisions for such officer re-designated as the Comptroller and Auditor-General of India.
His office is thus the creation of the Constitution. The Comptroller and Accountant-General is assisted by a Deputy Comptroller and Auditor-General and three additional Deputy Comptrollers and Auditor-Generals.
The Department is divided into five classes of offices, namely:
(a) The Civil Accounts and Audit Offices,
(b) The Posts and Telegraphs Accounts and Audit Offices,
(c) The Railway Audit Offices,
(d) The Defence Services Audit Offices,
(e) The Commercial Audit Offices.
In addition, there are two overseas offices:
(i) The Director of Audit, Indian Accounts in United Kingdom, London, whose audit jurisdiction extends to all the expenditure from the Indian revenues in the countries in Europe.
(ii) The Director of Audit, Indian Accounts in the U.S.A. Washington, whose audit jurisdiction extends to all the expenditure in both the Americas, met from the Indian Revenues.
The Civil Accounts and Audit Offices are situated in each of the States and are headed by Accountant-Generals. There are 68 subordinate offices functioning under this Department.
Limitations of Audit:
There are certain fields which are outside the purview of audit. Important among such fields are:
(a) Secret Service expenditure (A certificate from the Ministry of Home Affairs that the amounts have been utilized is admitted in audit and is deemed adequate for audit purposes).
(b) Contributions to International Organisations.
(c) Contributions to independent institutions receiving grants-in-aid of amount less than Rs. 1 lakh per annum recurring and Rs. 5 lakhs non-recurring.
(d) Grants given to local authorities are audited by Examiner, Local Fund Accounts, who is a provincial employee and not a member of the Audit Department.
Criticism of the Indian Audit System:
Dr. Appleby’s Criticism:
Dr. Paul H. Appleby, an American expert on Public Administration, strongly criticized our audit system in his Second Report on the Indian Administration.
He said “The function of the Comptroller and Auditor-General in India is in large measure an inheritance from the colonial rule. The function did not impede British rule; it upheld that rule and was an integral part of it. It greatly restricted the Indians who served the government. These restrictions were sought by the government, in situation of provincial administration largely concerned with police and taxation functions and not engaged in rapid pursuit of Welfare State objectives.”
“In the first flush of independence, the Indian ministries were disposed to disregard the Comptroller and Auditor-General, and abuses became vivid. This situation has been fully corrected, but in the process the old restrictive effects have been restored and strengthened at the very time that new policies were calling for more flexibility and more use of responsible discretion. The net result of this uncorrected situation is that the Comptroller and Auditor-General is today a primary cause of a widespread and paralyzing unwillingness to decide and act.”
“This repressive and negative influence is in considerable part indirect, impinging on the bureaucracy by way of Parliament because of the exaggerated and unselective attention given by Parliament to the petty exceptions and the inflated pretensions built around the pedestrian function of auditing. About two years ago there were signs of a more progressive approach in the office of the Comptroller and Auditor-General. Indeed, not very long ago he soundly recommended the transfer of the accounting from his jurisdiction to that of the Ministries. But latterly he deems to be falling deeper into some of the conventional ruts, and even digging them deeper. On his own motion, he has extended his review to “all existing undertakings in which the Central or State Governments have substantial financial stakes and such others as may be established hereafter” and “in addition to such audit as is required to be carried out under Company Law.” The underscored language in the instructions sent to ministries shows the extreme to which the assumption of review is extended.
This audit by the Comptroller and Auditor-General will be generally directed towards a review of the decision by the Board of Directors to ascertain to what extent their powers have been exercised in the best interest of the undertaking and to see whether the powers delegated to the Chief Executives have been exercised properly.
“Nothing could be more calculated to stop the Plan in its tracks, to undermine responsible government and to establish government of, by and for auditors. What special competence for appraising objectives and appraising administrative performance in general has the Comptroller and Auditor-General? What is Cabinet for, what is the Prime Minister for, what is Parliament for, what are the individual ministers for, what is Secretariat for, and what is a bureaucracy for?”
“Parliament is surely at fault in this. It has a greatly exaggerated notion of the importance of auditing to ‘Parliamentary responsibility’, and so has failed to define the functions of the Comptroller and Auditor-General as the Constitution contemplated it would do. Into the vacuum thus left, the auditor has moved.”
“Beyond legal definition confining his whole function, however, the Comptroller and Auditor-General can make his function most useful by confining himself further. Too many of his reports are mere substitutions of hindsight for the kind of judgement possible and necessary and proper at the time of action. Too many merely raise questions that are really questions of differences in judgment”.
Summing up the criticism, Dr. Appleby says:
“First the members of Parliament greatly exaggerate the importance of the functions of the Comptroller and Auditor-General, and pay far too much attention to his reports. So doing, Parliament increases the timidity of public servants at all levels, making them unwilling to take responsibility for decisions, forcing decisions to be made by a slow and cumbersome process of reference and conference in which everybody finally shares dimly in the making of every decision, not enough gets done and what gets done is done too slowly.”
Dr. Appleby feels that “the Comptroller and Auditor-General’s function is not really a very important one. Auditors don’t know, and can’t be expected to know, very much about good administration; their prestige is highest with others who don’t know much about administration. What auditors know is auditing-which is not administration; it is a necessary but highly pedestrian function with a narrow perspective and very limited usefulness. Any Deputy Secretary knows vastly more about significant problems in his ministry than the entire staff of the Comptroller and Auditor-General can discover by auditing. In close observation of various governments during many years the writer has never known of a really important insight produced by governmental comptrollers. Yet here the Comptroller and Auditor’s reports presume to speak as an authority on administration in general. They even presume to speak on the programmatic values of the various undertakings.”
In short, the main points of Appleby’s criticism are:
(i) The system is in a large measure an inheritance from colonial rule;
(ii) The Parliament and public give undue importance to the audit report.
(iii) Auditing is a highly pedestrian function with a narrow perspective and very limited usefulness.
(iv) Audit of public undertakings is not done in a fashion which may fit the nature of operations of each enterprise.
(v) Auditing is strictly negative and aggressive. It does not suit the needs of a Welfare Administration.
Mr. Chanda’s Criticism:
In fact Dr. Appleby’s criticism is rather too exaggerated and gives a distorted picture of the Indian audit system. Mr. A.K. Chanda, Comptroller and Auditor-General (Retd.), in a statement on August 15, 1956 at Lucknow, defended the office of the Auditor-General against the criticism levelled by Dr Appleby.
He said “I do not know the historical basis for such an observation (that the functions of C & A.G. is an inheritance of colonial rule). I do not know of any colonial system which had, or has, any analogous post, independent of the Executive with freedom to criticise administrative lapses. The conception of such a post runs counter to that of a colonial or autocratic system. Any student of constitutional history would be aware that this post was an essential one in a democratic form of government, as its functions were so defined as to secure public accountability of the administration.”
As for the ‘pedestrian function’ of audit, Mr. Chanda said:
“Dr. Appleby seems allergic to audit which he describes as a highly pedestrian function with a narrow perspective and very limited usefulness.” This attitude of mind has obviously coloured his observations on the Indian Audit Organisation.”
Emphasizing the importance of the Auditor-General’s office, Mr. Chanda referred to the ever-widening scope of its functions in every democratic country.
He said:
“In the U.S.A., the Comptroller-General’s audit covers banking institutions and other corporations in which the Government had any financial interest, even when it was not a majority. The U.S. Comptroller-General had also been given the power to issue surcharges against corporation and individual officers to effect recovery of expenditure which, in his opinion, was illegal.”
He further added:
“The powers of the Comptroller and Auditor-General in the U.K., as defined in the Exchequer and the Audit Act, were not also different from the present powers of his counterpart in India, except that they were more comprehensively defined. ”
The audit of the U.K. Comptroller and Auditor-General extended beyond the formulae of expenditure to an examination of its ‘wisdom, faithfulness and economy’. In the Continental democracies, there was constituted a court of accounts with a President who fulfilled analogous functions as the Comptroller and Auditor-General.
It is only against this background that the validity or usefulness of Dr. Appleby’s recommendations should be assessed.
Mr. Chanda, commenting on Dr. Appleby’s disapproval of auditing of public enterprises by the C. & A. G. said, “this suggestion ignores the basic differences between the structure of public and private enterprises.”
While, in the case of private enterprises, those in control have a significant financial stake in the concern and are also vitally interested in its financial operations, there is no such incentive in the case of State undertakings.
These are managed by officials without any direct financial interest…” There is a basic difference, Mr. Chanda said, between the functions of the Auditor-General and a professional auditor. In his words, A public auditor responsible for the audit of commercial enterprises is primarily concerned with the certification of the profit and loss account and the balance sheet.
So long as any expenditure is concerned by a sanction of the appropriate authority and it does not contravene the provision of the Company Law, he is precluded from commenting on the propriety of such sanctions or on the manner of exercise of discretion by the authorities concerned. But the audit by the organisation of the Comptroller and Auditor-General is much more comprehensive in its scope.
Its functions are not merely to ensure that the appropriations made by Parliament have not been exceeded without a supplementary vote or that the expenditure conforms to rules, but also to be satisfied as to its ‘wisdom, faithfulness and economy’.
These words are comprehensive in their scope and have led to a broader and newer approach, with greater attention to efficiency and to development of a discretionary audit directed towards discovering waste and matters beyond accounting, which, though intra vires, are apparently unwise or extravagant.
According to Mr. Chanda, the Auditor-General’s office is “one of the essential ingredients of a parliamentary democracy” whose rule is to “uphold the Constitution, and the laws in the field of financial administration.” “His role is to maintain the dignity, independence, detachment of outlook and fearlessness necessary for a fair, impartial and dispassionate assessment of the Executive in the financial field.”
Bhaunbre is rightly of the view “whatever the deficiencies of audit, the kind of attack which Appleby’s report launches on the Auditor-General would be deplored by all the well wishers of democracy.”
Mr. Chanda, however, recognises the need of reorienting our audit system so as to meet the requirements of the social ideology and objectives of the national government.
“In the past, audit and administration”, he says, “have functioned in watertight compartments. There has been little inclination to get together to understand each other’s points of view and what is more important to clarify issues and take remedial measures. Objections are raised, technical in character, even in respect of schemes and projects which have been executed with competence and expedition. It must be recognized that the purpose of a plan or project and the manner in which it is being implemented, are far more important than mere technicalities.”
The former President Shri R. Venkataraman inaugurating the Conference of Accountants- General on January 8, 1992 at New Delhi asked the Indian Audit and Accounts Department to revamp its procedures and practices in response to the changing environment and for the more effective discharge of their constitutional responsibilities.
He said that “A mere tally of vouchers with payments without examining how the money was collected and spent and with what effect, will hardly serve any purpose.”
The Audit and Administration should be brought closer. They should develop commonness of purpose, of endeavour, and of achievement. Both of them should be regarded as the components of the machinery of government. It is only when these components are properly synchronized in operation that the optimum result can be obtained.
Separation of Accounting and Auditing Functions:
A peculiar feature of our account and audit system is the combination of the accounting and audit functions in the same agency viz., Auditor-General. This combination of accounting and audit functions in hands of the same agency has been severely criticized for some time past.
To combine both these functions in the same organisation is incompatible with the present constitutional set-up of the country under which the Parliament has been given the supreme powers of control over national finance.
The Parliament can exercise effective control over public finance only through an independent audit of the accounts kept by the Executive. The accounts should therefore be maintained by the spending departments and they should be audited by an independent authority as is done in England.
There every department has its own Accounting Officer who works under a minister and is charged with the function of making payments, scrutiny of claims and keeping of accounts.
The Audit Department is separate and it has nothing to do with the accounting. Shri P.K. Wattal has emphasized the desirability of separating these two functions by remarking. Accounting is essentially an executive function and must be under the control of the executive head of the department. Auditing is a quasi-Parliamentary function, which of the works done by the executive authorities for report to the Parliament.
A combination of these two essentially distinct functions in a parliamentary officer is good neither for the executive administration nor for the Parliament. It is almost as bad as a combination of executive and judicial functions.
In every modern administration, accounting and auditing functions should be kept distinct and separate from each other. It is only then that the auditor’s certificate regarding the correctness of the accounts has any meaning. Where there is a combination of function there is necessarily a contradiction in as much as the officer compiling the account is also the officer who certifies its correctness.
This glaring defect of the Indian system of combination of auditing and accounting functions in the same person has been spotlighted by many a Commission also, like the Simon Commission and Welley Commission. In some States and in some departments, the two functions were once separated but the separation could not last long due to reasons of economy.
After the advent of freedom, this issue has become so prominent that even the various Comptrollers and Auditors-General have themselves condemned this system from time to time and advocated for the separation of the two functions.
Mr. Narahari Rao, the first Comptroller and Auditor-General of free India, in a note submitted to the Public Accounts Committee had written:
“The present arrangement under which the spending authorities are not responsible for the maintenance of complete and up-to-date accounts relating to the transactions for which they are responsible and the duty of compiling and maintaining these accounts rests upon an outside authority, namely, Indian Audit Department is wholly inconsistent with the various responsibility to the parliament to keep within the budget grants and appropriations. Indeed existing arrangements blur the responsibilities and are highly defective. The separation of audit from accounts organisation of the necessary accounting machinery under the administrative departments with a view to removing these serious defects and the enforcement of effective executive control are essential and overdue and I, as Comptroller and Auditor-General, attach the greatest importance to these reforms being carried out after the minimum interval required to introduce the necessary organisational changes.”
An Introduction to Indian Government Accounts and Audit puts the problem as follows:
“In 1924 an experimental scheme of separation of Accounts from Audit was introduced on the civil side in the United Provinces (now Uttar Pradesh) and also in certain departments of the Government of India. This experiment was amended in 1931 expressly on financial grounds, as the separated Accounts system was found to be more expensive. The system of combined Accounts and Audit is, however, unsound in theory, and it tends to undermine the independence of audit by combining with it the functions of accounts, which are entirely those of the executive authorities. Man-power problems now stand in the way of these very necessary reforms which will have to be seriously taken up when the man-power position improves.”
The Public Accounts Committee in its third report (1952-53) expressed itself in very strong terms in favour of separating accounting from auditing and recommended to the Government to do the needful.
An abstract from the observations made by the Committee on the point in question is reproduced as follows “The function of payment and maintenance of initial accounts is that of the executive authority, and it is well known and universally accepted that the agency which has to audit payments should be separate from and independent of the agency which has to make disbursements, as a combination of these functions is likely to facilitate frauds and embezzlements and prevent their coming to light. This places the Auditor-General in a most embarrassing and anomalous position. It is fundamentally wrong in principle, therefore, to make Indian Audit Department responsible for marking payments. The Comptroller and Auditor-General has informed the Committee that he as well as his predecessors have been protesting to Government from time to time against the impropriety of his department being made responsible for pre-Audit and treasury payment work and pressed for its being relieved of this work. This work is constitutionally entirely outside the duties of his department. The Committee endorses the views of the Comptroller and Auditor-General that his department should be relieved of this work without the least possible delay and recommends that urgent steps should be taken to that end by the Governments concerned.”
As a statement of an abstract principle the separation of accounting from auditing is unassailable, but many problems will arise if accounts are transferred to spending departments.
“The departmentalization of accounts will require arrangements for the consolidation of these accounts and their compilation into the combined Finance and Revenue Accounts of the Union and State Governments as a whole. It will be necessary to ensure that uniformity in accounting principles and procedure is observed in the Ministries. Co-ordination between the Union and the State will have to be provided for… The question whether adequate and efficient audit can be provided by an agency, unfamiliar with the departmental structure of accounts and of rules and regulations of special applications, also becomes relevant and important in this consideration. The formation of linguistic states where the business will be conducted in the regional language is likely to create yet another problem.”
The discussion can be summed up by explaining the case for and against separation of Accounts from Audit.
Case for Separation:
(a) Separation will lead to efficiency of Audit Department as it will have ample time to devote itself to more important enquiries and investigations.
(b) The keeping of the two together places the Auditor-General in a very embarrassing position as he is expected to audit the accounts compiled by himself Hence in many other democracies, the two have been bifurcated. It speaks of the popularity of the move to keep the two separate from each other.
(c) Frauds and embezzlements can be prevented if the two are separated as the officer authorizing the payment is not made responsible for admitting the charge in audit.
(d) The separation will facilitate close budgeting and more effective preparation of revised estimates. With the bifurcation of the Pay and Accounts Departments, a close understanding between the two can develop. Such an understanding will help in preparing their budget and revised estimates more effectively.
(e) Accounting, being an Executive function, should be entrusted to the executive head of the department, whereas Auditing, being a quasi-parliamentary function, should not be combined with the Accounting.
(f) Separation is in consonance with the sound financial administration. Accounting responsibilities must be entrusted to the spending departments so that they may not exceed the appropriations passed by the Parliament.
(g) The transfer of accounting responsibilities to departments will mean opting for a logical pattern of administration. Ashok Chanda correctly remarked, “…In Government…authority is diffused and financial control and accounting responsibilities vested in organisations outside the administrative departments. The malaise of India’s administration has been this divorce of authority from responsibility.”
Case against Separation:
(a) Experience speaks otherwise. In the Departments of Defence and Railways where the accounting responsibilities have been entrusted to the Departments, there is no positive indication of increase in efficiency or effective budgetary control.
(b) It is more economical to maintain status quo as the same manpower can be utilized for the both in accounting and auditing. Separation would mean more expenses as two sets of persons will be required.
(c) It is apprehended that separation may lead to decline in competence. Already administration in the country is facing an eclipse.
(d) The accounting staff if separated from the audit and placed under the general control of the respective departments of the State Government will not be able to indulge in criticism of the executive freely and restrain extravagance, as it can do now.
(e) The present system is working on satisfactory lines. Why should it be changed at all? The theoretical excellence of the separation can hardly prove useful.
(f) Separation of audit from accounts hardly guarantees keeping of appropriations within the sanctioned limits. U.K. system is the instance worth quoting to support this contention.
(g) The present system can easily detect discrepancies as accounts are maintained both by the Accountant-General and the Heads 6f the Department. This may not be possible if separation is effected.
(h) The separation will mean centralizing the payments under the Pay and Accounts Officer. Such centralization is apt to cause difficulties in our country where banking facilities are comparatively inadequate.
(i) It is further maintained that even under the present system the Accountant-General’s staff renders adequate help and assistance in the preparation of budget and revised estimates. Why then the separation be envisaged?
An appraisal of the arguments on both the sides makes us conclude that a thorough study of the pros and cons of such a step is essential before it is actually taken.
The Government, however, accepted the separation of audit and accounts in principle and steps were taken to separate audit from accounts gradually. The Central accounting was discontinued with regard to three Departments of Supply, Food and Rehabilitation with consequent departmentalization of accounts on April 1, 1955 to begin with.
The Railway Accounts and Defence Accounts have always been kept by the Financial Commissioner for Railways and the Financial Adviser, Defence, respectively.
On March 1976 through two ordinances President of India separated the audit from accounts. The ordinances were replaced by an Amendment Act at a later stage. Commenting on the Amending Bill C. Subramaniam remarked, “we are trying to improve our financial management we want to be a little more modern and get away from the colonial method of financial management.”
The C.A.G. has been relieved of the responsibility for compiling the accounts of the Central Government, but he continues to be responsible for the maintenance of accounts of the State Governments.
The Revenue accounting work was also taken over from April 1, 1977. Under the new scheme the Chief Accounting Authority for all transactions of the Ministry and its attached and subsidiary offices is the Secretary of the Ministry who gets assistance from the Financial Adviser in the performance of his duties.
The Secretary as the chief accounting authority is overall responsible for the efficient working of the payment and accounting set up.
The financial adviser looks to:
(i) Preparation of the budget of Ministry and its departments;
ADVERTISEMENTS:
(ii) Arranging payments sanctioned by the Ministry;
(iii) Consolidation of the accounts for the ministry as a whole;
(iv) The preparation of Appropriation Accounts for ministerial grants;
(v) Ensuring accuracy of accounts and efficiency of operation;
(vi) The introduction of an efficient system of management. The Financial Adviser is assisted by the Principal Accounts Officer, other Accounts Officers and the staff.