A case for rejecting the Irani committee recommendations, which seek to remove the authority of the Comptroller and Auditor-General of India to audit government companies.
THE Ministry of Company Affairs constituted on December 2, 2004, an Expert Committee under the chairmanship of Dr. Jamshed J. Irani to advise the government on the new company law. The Committee submitted its report on May 31, 2005.
Its recommendations have been welcomed by the industry and business and widely debated in the press. However, it is regrettable that the recommendations relating to government companies and their audit by the Comptroller and Auditor-General (CAG) have not received the attention of the press or legal experts. If these were to be accepted by the government and incorporated into the new company law, there will be serious consequences affecting the basic constitutional feature of the parliamentary system in ensuring the accountability of the executive and the public enterprises.
The Irani committee deals with government companies in Chapter III (paragraphs 7.1 - 7.4) and their audit in Chapter IX (paragraphs 37-40). Its recommendations, in essence, are: (i) The government companies should not be granted relaxations, as this would affect the level playing field in a market economy; (ii) the cost of non-commercial unviable responsibilities discharged by government companies should be funded through the Budget as subsidy; (iii) only companies in which Central/State government holds majority stake should be treated as government companies. Subsidiaries of government companies should not be treated as government companies; (iv) the existing provisions of the company law enabling the CAG to conduct a supplementary/test audit is superfluous as it duplicates the work already done by the statutory auditor, leading to delays.
These recommendations explicitly seek to remove the CAG's authority and legal capability to audit government companies and reduce his constitutional right to a mere procedural farce.
There are two types of public sector undertakings (PSUs): (i) statutory corporations (for example, the Damodhar Valley Corporation, the Food Corporation of India, the Central Warehousing Corporation and the State Warehousing Corporations) and (ii) government-owned or -controlled companies, which are established under the Companies Act, with not less than 51 per cent of paid-up share capital held by the Central government or by any State government or partly or wholly by both and which include holding companies with more than 50 per cent of the share capital of their subsidiaries. In respect of statutory corporations, provisions for CAG audit are specifically included in the laws governing them.
When the Government of India decided in the 1950s to organise other public enterprises as private limited companies that did not have any statutory provision for CAG audit, under the Indian Companies Act, 1913 (the then prevailing Act), there were some arguments against audit of such companies by the CAG on the grounds that formation of a government company under the Act tended to whittle away parliamentary control.
The then CAG, V. Narahari Rao, said that not subjecting government companies to CAG audit was a fraud on the Constitution. The Public Accounts Committee (Third Report 1952 - 53), supporting the CAG's view, said: "The Comptroller and Auditor-General should have the unquestioned right to audit the expenditure of these concerns, by whatever name they may be called, because they are financed from the Consolidated Fund of India."
During the discussion on this issue in the Lok Sabha on December 10 and 11, 1953, the Finance Minister agreed to enact a law covering all government companies and also making it compulsory to have them audited by the CAG and present reports to Parliament in the usual way for scrutiny by the Public Accounts Committee (PAC).
The Companies Act, 1956, empowered the CAG to (i) appoint statutory auditors to audit and report on the annual accounts of government companies, (ii) issue directions to the statutory auditors as to the manner in which the audit is to be conducted, and (3) conduct a test/supplementary audit and to comment on or supplement the (statutory) auditor's report.
The Act requires that the statutory auditor submit a copy of his report to the CAG and (ii) that the CAG's comments be placed before the annual general meeting of the company. The duties, powers and conditions of Service Act 1971 (DPC), mandates the CAG to audit government companies under the Companies Act.
THERE are vital differences between the work of a statutory auditor and that of the CAG. The statutory auditor's report contains only an opinion and deals with matters that are statutorily required to be addressed. The CAG's reports on government companies highlights avoidable/wasteful expenditure, loss of revenue, losses owing to the inefficiency of managements, improprieties and so on. This improves the accountability of these undertakings to Parliament and cannot be considered as duplication of work or superfluous.
Further, the Supreme Court has held that a government company is an instrumentality or agency of the state and as such, it comes within the term "state" used in Article 12 of the Constitution. This makes it clear that government companies cannot be equated with non-PSU companies and that they have greater accountability to the public inasmuch as their executives have no stake in their fortunes. Such accountability is at present sought to be enforced only through the audit reports to Parliament and State legislatures, whereas the scope of an audit by a statutory auditor is limited to certification of "true and fair view" of the state of affairs of the company as revealed by its annual financial statements. The reports of statutory auditors do not take into consideration the peculiarities attached to government companies and the policies the government seeks to implement through them. Further, the statutory auditors do not examine the issues of propriety, regularity, efficiency and so on, which have been the mainstay of the CAG Audit.
A study of the opinions of the Expert Advisory Committee of the Institute of Chartered Accountants of India would reveal that most of the issues referred to it are on the basis of the errors pointed out by the CAG, and in almost all the cases the Committee had conceded the validity of the objections raised by the CAG. This proves that the CAG has been effectively ensuring the best presentation of accounts by companies and their compliance with the statutes/accounting standards.
Many government companies revise their accounts on the basis of the CAG's observations during his test/supplementary audit after the certification of the accounts by the statutory auditors. As many as 17 Central government companies revised their accounts for 2003-04 (20 companies in the previous year).
The CAG conducts transaction audit, which is unique as the examination of a public body is done with due regard to wisdom, faithfulness and economy. This includes what is known as efficiency-cum-propriety audit or value for money audit.
Formation of Audit Boards is another function of the CAG, at the suggestion of the Administrative Reforms Commission (ARC). These boards provide broad surveys and reviews of public enterprises together with their achievements and failures. They consist of technical experts who have considerable experience in the industry concerned and help in analysing and understanding all aspects of public enterprises. The CAG sends reports on receipts and expenditures of the government companies. These reports reveal any leakage of revenue, avoidable/infructuous expenditure.
In the report for 2003-04 (Union government-Commercial), the CAG has reported the following instances of avoidable/infructuous expenditures: (a) overpayments, wasteful/excess/ avoidable expenditure and undue favour to contractors, and so on, amounting to Rs.417 crores in 56 cases; (b) non-recovery of loans owing to insufficient securities and absence of effective internal control systems resulting in the loss of Rs.316 crores in nine cases; (c) idle investment amounting to Rs.202 crores in 28 cases as a result of delay in commissioning projects, blocking of funds, and so on; (d) loss owing to shortloading of insurance premium, undercharging of premium, lacuna in the policies/procedures resulting in the loss of Rs.174 crores in 19 cases; and (e) loss of Rs.172 crores owing to incorrect recovery of penal interest, short recovery of burnt oil, transit loss of gas, and so on in 22 cases. Recovery of Rs.3 crores was made at the instance of audit in one case.
IF the Irani committee's recommendations were to be accepted in respect of scrapping public audit of government companies, it will annihilate the entire structure of the constitutional authority of the parliamentary system as detailed below:
(a) Dispensing with the practice of public audit under the primitive Companies Act, 1913, will be a "fraud on Constitution", as stated by V. Narahari Rao, the first CAG of Independent India.
(b) Accountability and legislatures' control will be completely lost in respect of the public undertakings of the Union government with a total investment of Rs.1,97,719 crores and of State governments with a total investment of Rs.1,86,041 crores.
(c) The legislatures will not have an idea of the annual financial income of the companies; for instance, there will be no supervision or control over the total income of the Central PSUs, which is as huge as Rs.6,19,889, crores in 2004-05.
The CAG will be left with the power to audit six statutory corporations of the Union government and 88 statutory corporations of the State governments. In such a situation, the government may as well close down the office of the CAG and privatise the work; that is, leave it to the statutory auditors and be content with the certificates of voucher-expense audits they produce. In the absence of comprehensive audit reports by the supreme audit agency, which is a sine quo non for any parliamentary system of a functioning democracy, there will be no need for the Committees on Public Undertakings and several of the Standing Committees in Parliament and in the State legislatures. In a way, this may effect savings in expenditures of legislatures and also save the executive and the managements of government companies from much work and worry.
Business associations have understandably welcomed the expert committee's recommendations that private companies should have level-playing fields to compete with public sector undertakings and they are insisting on early steps for legislation to give effect to the Irani committee recommendations.
Prem Chand Gupta, Minister of State for Company Affairs, is enthusiastic and seems to be in a hurry to have the Bill passed without delay, without reference to and scrutiny by the Standing Committee of Parliament. The Irani Report was submitted on May 31, 2005. On July 4, 2005, addressing a conference of Confederation of Indian Industry (CII), the Minister indicated how he would have the legislation passed without any difficulty. Here, excerpts from a newspaper report:
"The new company law Bill is likely to be tabled in the winter session of Parliament with basic legal framework ready by August-end...
"Pointing out that there was a procedure to be followed, Mr. Gupta said opinion from different government departments had to be invited before the document is sent to the Cabinet and then tabled in the Parliament. `If the Bill is referred to the Standing Committee of Finance, things will go out of our control,' he said. The Minister said efforts would be made to ensure the Bill is not referred to the Standing Committee. `We will meet the members of the Finance Committee and explain the necessity of bringing in this act. We will also call upon the Lok Sabha Speaker, the Rajya Sabha Chairman,' Gupta added."
It has been reported in the press that the government proposes to empower the CAG to (i) appoint the statutory auditors for government companies, (ii) issue directions to them as to how the audit is to be conducted, and (iii) look at the option of any of the government companies conducting test/supplement audit. If the test/ supplementary audit is to be conducted by the CAG at the discretion of the company concerned and not as a statutory requirement, it would amount to a "fraud on the Constitution".
The Minister of Company Affairs' statement that "if the Bill was referred to the Standing Committee of Finance, things would go out of our control" is an affront to the Rules of Procedure and the working of Parliament and its committee system.
By declaring openly that he would call upon the Speaker of the Lok Sabha and the Chairman of the Rajya Sabha and meet the Members of the Finance Committee to ensure that the Bill will not be referred to the Standing Committee, the Minister commits the grave offence of denigrating the high offices of Chairman and Speaker and damaging the dignity of the Standing Committee and its respected members.
The House is the master of its procedures. It can change or suspend the rules of procedure and allow or disallow any demand in the House. But it should not allow itself to be humbled, humiliated or denigrated so blatantly.
Parliament, its members and the committees should strengthen the rights and power of the CAG to audit all public sector enterprises and ensure their full accountability to the people. The government companies are largely financed out of the consolidated fund of the Centre/States. It is the money given by the people, to be invested for the people and hence should be accountable to them through Parliament. Anybody who stands against public accountability stands against the people.
Era Sezhiyan is a former Member of Parliament.