CAG audits: Another pair of eyes won't hurt companies

On April 17, the Supreme Court widened the powers of the Comptroller and Auditor General (CAG). Instead of only government departments and state-owned undertakings, the CAG can now audit private companies, too.

Its recent audit reports on allocation of radio frequency for telecommunications and coal mines have led to the removal of a minister, cancellation of coal blocks and a series of inquiries by the Central Bureau of Investigation.

As the dust over the expansion of the CAG's ambit settles down, initial fears of intrusive corporate oversight appear exaggerated.

Vinod Rai, former CAG, who pushed for audit of private companies, says the Supreme Court order is only an enabling clause. "It will be an audit done on rotation - pick and choose - wherever there is a need for an audit."

In 2010, for instance, the department of telecommunications had asked the CAG to audit revenue sharing between the Centre and telecom licence holders.

"An audit by the CAG is to identify whether a company has paid or provided all sums due for use of resources controlled by the government," says N Venkatram, managing partner, Deloitte Haskins & Sells, an audit, tax and consultancy firm.  A general audit of a financial statement, on the other hand, bases itself on the auditor's assessment of the risks of material mis-statements. The nature, timing and extent of such audits are planned and performed to address such risks and provide an opinion the financial statements are true and fair.

"The techniques (of a CAG audit) will be focused towards detecting understated or undisclosed amounts that could result in loss of revenue to the government. It will not be unreasonable to expect that the CAG audit will be carried out under the presumption that there is an understatement of amounts due to the government," says Venkatram.

A CAG audit will be specific to a set of transactions of a company, say, revenue share on roaming charges in telecommunications.  But companies need extra resources to support the exercise, increasing the cost of complying with government contracts. Tata Power Delhi Distribution Ltd earlier this month said it was putting in extensive man hours to cater to the queries by auditors about its power distribution business in Delhi.

Companies will also have to defend their costs. Reliance Industries on November 3, 2012, went to the extent of stating it "welcomes comments on operational matters if such comments come from experts having the requisite knowledge of the complexities of deep water operations in oil and gas sector". The company had a running dispute with the CAG on the kind of information being sought from it, but it did not contest the government's right to audit a gas production sharing contract.

"The CAG is conversant with government policies and regulations. While they may be limited by the availability of staff to carry out audits on companies, they may look to engage chartered accountants who can work under their direction," says Venkatram.

CAG officials, however, dismiss the need for additional manpower. Of a total CAG staff of 46,936, some 88 per cent directly contribute to auditing. They point out that so far no work of the CAG has been outsourced. "Even before the Supreme Court order, a technical board for professional practices was formed in early 2014 to advise on audit and accounting procedures," says a CAG official who does not wish to be named.

On the issue of excessive regulation - companies file their financial statements with the registrar of companies and the stock exchanges - Rai says when government-owned companies have to go through both financial and CAG audits, private companies can subject themselves to the same exercise.

Financial audits can be fixed, the most infamous case being Satyam Computer. A CAG audit could add another pair of eyes. Besides, it could help lift the corporate veil over company decisions not in the best interests of shareholders.

"The outcome of a CAG audit could arguably result in lifting the corporate veil, especially if a company has used other entities to circumvent payment of its contractual dues to the government," says Venkatram.

Rai says a CAG audit could be good for corporate transparency. "Companies should be happy about it."

The genesis

The Supreme Court order was in response to a petition by the Association of Unified Telecom Service Providers of India against a Delhi High Court verdict allowing the Comptroller and Auditor General (CAG) to audit private companies. The court upheld the CAG's right to audit under Articles 148 and 149 of the Constitution and Section 16 of the Duties, Powers and Conditions of Service Act, 1971, that governs the CAG's functioning. The court struck down the contention of the Telecom Disputes Settlement and Appellate Tribunal that a CAG audit could be conducted under the unified access service licence if the licensor, the department of telecommunication, found there was a mis-declaration or mis-statement of facts by the licensee.