Credibility of govt accounting

Are official revenue-expenditure records evaluated critically and exhaustively enough?

At a centennial event in the first week of December 2021, the Public Accounts Committee’s (PAC) hundred years of existence was commemorated in Parliament. The PAC’s crucial role in scrutinising the use of government funds was highlighted at this function. The Comptroller and Auditor General’s (CAG) reports on spending by India’s central and state governments are submitted to Parliament and are examined by the PAC. Currently, both central and state governments use cash flow accounting while private Indian companies have to necessarily follow accrual-based accounting standards. This article discusses ways to improve the PAC’s oversight.

The PAC is a parliamentary committee and customarily the leader of the largest opposition party in the Lok Sabha is the chairperson. The office of the CAG was set up under Article 148 of the Indian Constitution and since independence, the central government has usually appointed serving or recently retired government officers as CAG. The repeated selection of CAGs from the Indian Administrative Service rather than from any other service is not particularly relevant in ensuring accuracy in government accounting. The crucial issue is whether CAGs can be influenced to overlook errors, intentional or otherwise, in the accounting of government revenues and expenditure. In this context, can a recently retired or serving government officer be expected to discharge her/his function at sufficient arm’s length from government?

The final appointing authority for the CAG position is the prime minister (PM) and no one from outside the government is involved. For the Central Vigilance Commissioner’s (CVC) appointment, the PM, home minister and the opposition leader in the Lok Sabha are members of the selection committee. As for the director, Central Bureau of Investigation (CBI), the appointment committee includes the PM, opposition leader of the Lok Sabha and the chief justice of the Supreme Court. Thus, the selection process of the CAG, even though it is a statutory body, is driven entirely by the ruling central government, compared to that for the CVC or director, CBI. The dismissal of the CVC requires the recommendation of the Supreme Court, and a special resolution has to be approved by both houses of Parliament to remove the CAG.

Clearly, the selection panel for the CAG’s office needs to be widened to include the PAC chairperson and the chief justice of the Supreme Court to make it at par with that for appointment of director CBI. A crucial consideration in selecting CAGs should be to choose a professional who can present complex audit reports in simple terms. If CAG reports are not summarised in easy enough terms, it would be difficult for the PAC to dig through the details to get to the core of matters. To that extent, unjustified government spending would go undetected.  

Illustration: Binay Sinha

Ideally, the PAC chairperson should have a reasonable understanding about accounting principles and practices. However, that may be too much of an ask given that even the CAG is not expected to have any specialised expertise in accounting. Consequently, it would help towards realising the objective of greater transparency about government spending if two independent private sector accounting firms, chosen by the PAC, were to provide analytical comments about CAG reports confidentially to the PAC. The purpose should not be to detect any obfuscation by the CAG or to belittle that position. It should be more for PAC members who are usually generalists to receive independent expert evaluation in the simplest of terms about the CAG’s reports. 

Separate sub-committees of the PAC consider expenditures incurred by the ministries of defence, railways, external affairs, finance and so on. That is, all the trappings for exhaustive inspection of government accounts are in place and the PAC’s reports are available on Parliament’s website. However, even a cursory perusal of the reports gives a sense that these reflect a mechanical filling out of forms kind of approach rather than a systematic and in-depth scrutiny of the major heads in government’s accounts.

One out of the several concerns about government spending is that sizeable volumes of funds are allocated repeatedly to recapitalise public sector banks (PSBs). According to the central government’s numbers, it has provided Rs 90,000, Rs 100,000 and Rs 60,000 crore as funding support to PSBs in fiscal years 2017-18, 2018-19 and 2019-20, respectively. Although the Reserve Bank of India is the regulator for the banking sector, the CAG needs to assess the extent and manner in which the central government has used taxpayer funds to recapitalise PSBs. Taxpayers expect that when it comes to reviewing government expenditures, the PAC would also look into CAG reports on the huge amounts doled out to PSBs, waivers of agricultural loans and so on. The central government’s agricultural loan waivers amounted to about Rs 51,000 and Rs 81,000 crore, at today’s value of the rupee, in 1990-91 and 2008-09, respectively. The implementation of such waivers is usually staggered over several years and the PAC should check if the net present value of the amounts waived added up to more than the announced total amounts. The CAG has commented about deficiencies in the accounting statements of several state governments. This too needs careful examination by the PAC since collectively the state governments spend more than the central government.

The government will present its Budget for 2022-23 within a week on February 1. Some in the print media and several Indian industry-financial sector captains will certify the Budget’s revenue estimates and gush about the various spending proposals. However, going by past experience, there will be relatively little attention spent on correlating the budget numbers with recent CAG reports or the deliberations of the PAC.

History is said to repeat itself — the first time as a tragedy and the second time as a farce. Ignoring the several other ways in which this pithy remark can be interpreted if the PAC does not point an auditing searchlight on government finances, official revenue and expenditure numbers could descend to the level of a farce. 

j.bhagwati@gmail.com. The writer is a former Indian Ambassador, Head of Corporate Finance World Bank and currently Distinguished Fellow at CSEP