Business Standard

Should CAG audit private companies?

Companies have to live with multiple audits, but two audits with the same objective must be avoided

Asish K Bhattacharyya 

A recent Delhi High Court's judgment has empowered the Comptroller and Auditor General of India (CAG) to audit the revenue receipts of private telecom companies (Bharti Airtel Ltd, Ideal Cellular Ltd, Vodafone India Ltd and Reliance Communications Ltd), following which the Association of Unified Telecom Service Providers of India (AUSPI) has filed an appeal before the Supreme Court against the Delhi High Court order.

Similarly, on January 22, 2014, three Delhi-based power distribution companies (BSES Yamuna, BSES Rajdhani and Tata Power Delhi Distribution Limited), in which the Delhi government has a 49 per cent shareholding, filed a writ petition in the Delhi High Court challenging the state government's move to have a CAG audit of their accounts. They argue that the audit has no legal sanctity.

These events have raised the debate on whether CAG has the authority to audit private companies, particularly companies that operate in the public-private-partnership (PPP) model. We may expect that the courts will settle the issue. One aspect that has missed the attention in the whole debate is the question whether we need multiplicity of audit and whether CAG is more competent or independent than practising audit professionals (chartered accountants and cost accountants) who conduct independent audit of financial statements and cost records of companies.

The reluctance of private companies to get their books audited by CAG is understandable. An auditee never welcomes audit and opposes any proposal to introduce an audit. On the other hand, the entity to which the auditor reports, enthusiastically welcomes the audit. The auditor acts as its eyes and ears. An interesting example is the scope of internal audit formulated by the top management. It is keen to strengthen internal audit, but never wants to put itself in the position of the auditee. It is rarely that management audit is included in the scope of internal audit. Strategy audit by the Board also does not find favour with the executive management.

Industry has a natural bias against audit. It would be incorrect to conclude that industry's opposition to a proposed audit implies that such an audit is a waste.

According to media reports, industry opposes cost audit. But a quality cost audit by an expert is a very potent tool to the Board in evaluating enterprise performance and productivity of resources and ensuring the integrity of information that is being used in strategic and operating decisions. The objective, approach and procedure of different types of audit are different. Therefore, one audit is not adequate to ensure effective enterprise governance and compliance with law.

For example, the Excise Department relies on cost audit while the Income Tax department relies on tax audit.

The scope of financial audit is limited to ensuring true and fairness of information provided in financial statements while cost audit ensures integrity of cost information and reports on enterprise performance. CAG's performance audit is different from financial audit or cost audit. Companies have to live with multiple audits.

Two audits with the same objective must be avoided. For example, CAG audit of telecom companies has the similar objective as that of the special audit conducted by chartered accountants. Therefore, a CAG audit will result in duplication of efforts. It appears that the government has more confidence in CAG rather than in practising audit professionals. This raises the question whether CAG is more competent and independent than those professionals. There is no reason to believe that CAG's team is more competent. As regards independence, CAG scores a bit above audit firms. CAG is a public sector auditor, its independence is protected by the Constitution and it has no motivation to compromise on independence, as it does not receive fees from the auditee.

However, a CAG audit cannot be as independent as it is made out to be. Individuals who conduct the audit are human beings like practising audit professionals and they are also exposed to the risk of losing objectivity and might fail to protect their independence under pressure. A PPP model will be used more extensively. The tendency to force a CAG audit on private companies in which the government or public sector enterprises have significant shareholding is dangerous.

This will create a huge burden on CAG and, consequently, on the public exchequer, resulting in a national waste of resources. It will also hurt the auditing profession, as it will signal the government's lack of confidence in the profession.

The Companies Act provides enough mechanisms (like audit committee) for the Board to protect audit independence. The government as a block shareholder should ensure effectiveness of the Board, rather than ordering a CAG audit, even if the law permits it.

Affiliations: Professor and Head, School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs; Advisor (Advanced Studies), Institute of Cost Accountants of India; Chairman, Riverside Management Academy Private Limited.

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First Published: Sun, January 26 2014. 21:49 IST