CAG deserves a more prominent role in public financial management

Various reports of Comptroller and Auditor General (CAG) of India have played an important role in the ongoing debates on weak governance and corruption in the country.

CAG’s reports on the 2G spectrum allocation; fertiliser subsidies; schemes under MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act), and others have lent much needed substance, and quantitative basis to these debates.

The constitutional responsibility of CAG is to provide Parliament, and through it to the citizens, independent assurance on the way in which the government has used and accounted for funds voted by Parliament and on the examination of the tax system.

In a well functioning system of public financial management (PFM), financial reporting and analysis on the use of resources, which concerns CAG, is an integral part along with mobilisation  and allocation of resources according to various priorities, and administration and control.

It is, therefore, lamentable that high level policymakers of the UPA government, including the Prime Minister, have given priority to narrow partisan politics requirements in the short term over long term national interest by publically questioning CAG’s commendable efforts to fulfill its constitutional role.

The policymakers should realise that policies and administration or implementation cannot be de-linked from each other. In public finance literature, it is well accepted that in many situations, tax administration is tax policy. The standard excuse that policy was “good”, but implementation was not, lacks merit. A policy should take current and prospective institutional and organisational capacities into account. Without it, policy objectives would be difficult to achieve.

While it is indeed the prerogative of the executive branch of government to design and implement policies, CAG’s role in analysing both the transactional integrity and the extent to which the programme under these policies could achieve better outputs and outcomes with given outlay of budgetary expenditure should also be recognised. Indeed, the VFM (value-for-money) audit should become a standard practice for CAG.

To enable CAG to pursue its role in PFM, with greater effectiveness, there are several measures which merit consideration.

First, CAG is an external audit institution which follows international benchmarks. It can play its role better if internal audit functions of the covered government organisations are strengthened. This is the responsibility of the executive branch at all levels of government. If the internal auditing function is strengthened, considerable efficiencies could potentially be attained at a much earlier date in the policy cycle. This would also help reduce over reliance on CAG. The executive branch should be required to be transparent and accountable about the measures which are designed to strengthen internal auditing.

Second, the current CAG Act enacted in 1971 requires modifications. There is strong merit in changing the focus of CAG Act from funding (currently only the government agencies, and bodies substantially financed from the consolidated fund are included) to governance orientation.

The current CAG Act creates ambiguity concerning the auditing requirements of certain urban and local bodies, development authorities, special purpose vehicles, and those involving public private partnerships (PPPs). As India becomes increasingly urbanised, and as the role of development authorities, PPPs etc. increases, their inclusion in CAG Act to ensure that significant proportion of the expenditure does not escape auditing requirements merits serious consideration. The auditing need not be necessarily undertaken by CAG. In certain cases, approved private sector auditing firms could be an acceptable alternative. The CAG Act, however, must clearly delineate the agencies to be audited by CAG.

Third, CAG Act also needs to clarify the scope of the term ‘audit’. While the Act does not define it currently, in 2005 there was a clarification issued that CAG can undertake economic efficiency and effectiveness of government receipts and expenditures. This in effect would permit the CAG as a supreme audit institution to shift from transactional integrity to VFM audit, thus facilitating effective decision making. It would be useful for the Act to explicitly include the 2005 clarification, and enable the CAG to augment its current stock of multi-skilled and talented staff.

Fourth, the arrangements for CAG to play an advisory role when a large programme or a scheme is being designed or implemented, also needs to be strengthened. For instance, the ambitious and expensive Aadhaar programme, being implemented at the Unique Identification Authority of India led by Nandan Nilekani, could lend itself to CAG’s advisory role.

Fifth, it is curious that currently there are no requirements that CAG must have access to the relevant records of the organisations being audited. This is often a major constraint in the smooth functioning of CAG. This constraint is often magnified by the poor quality of data, and limited data management and mining capabilities of the government organisations.

It is encouraging that the rural development ministry has recently expressed interest in its programmes and schemes being audited by CAG. It is hoped CAG will be encouraged to undertake VFM audits as well. The ministry could also consider involving CAG at an earlier stage of their policy and programme cycles; strengthening its data gathering and monitoring systems; and improve its internal financial management and auditing skills to realise maximum benefit from CAG’s expertise.

Sixth, the CAG has an important role at the state level as well. In 2009-10, states accounted for more than half of the combined expenditure of the central and state governments. This suggests a strong need to revamp the role of public accounts committees (PACs) of the state legislatures. Their deliberations should be made public. The states would particularly benefit from CAG’s expertise by involving them in an advisory role at earlier stages of policy and programme.

As India’s GDP continues to rise, even if government expenditure to GDP ratio remains constant, the budgetary revenue and expenditure will rise substantially in absolute amounts. India is fiscally severely constrained, with high propensity for disregarding fiscal probity and discipline.

Under these circumstances, it is imperative that CAG be empowered to pursue its integral role in PFM. CAG on its part needs to equip itself with requisite organisational culture which emphasises learning and integrity, development of human talent, and investment in physical resources to perform its constitutional responsibilities.

The writer is a professor at
Lee Kuan Yew School of Public
Policy, National University of
Singapore and can be reached at sppasher@nus.edu.sg.
Views are personal.