A well-functioning democracy requires that the governments are held accountable for their actions by the citizens of the country. Though, to hold them accountable requires information about various indicators including their performances. One such process of analysing and evaluating the performance of the government is called ‘Audit’.

What is Audit?

Audit can be defined as – A systematic inspection of the records related to a specific entity or event to verify if these follow the prescribed standards/guidelines.
For example, tasks undertaken by the government have specific objectives, are allotted a budget, and involve different process and actors. Once such process has been completed and the necessary data/information has been recorded, these records are inspected according to predefined standards and regulations to check whether:

• The budgetary allocation was spent as per the stated process, 
• The actors/institutions adhered to the guidelines, 
• There exist any discrepancies in the fund flow/expenditure, and so on. 

A report is published consisting of all the findings of such inspection. All these procedures combined are termed as audit.

The budget sets out the fiscal policies of the government, detailing revenue, spending, and the economic policies on which these are based. As a public document, the budget requires public disclosure, evaluation, and auditing. The audit phase is the last stage in the budget cycle as it can be undertaken only once the necessary records and information are available.  The audit reports are then presented to the President/Governors who then lay them before the Parliament or State Legislatures respectively before the budget season begins. Supreme audit institutions play a key role here. The auditor audits not only the expenditure but also the revenues. For instance, it checks whether correct procedures and rules have been followed while collecting taxes. Beyond this, it may also analyse the revenue implications of certain government policies. 

It should be noted that in this section auditing has been discussed only in relation to government budget and performance. But, the process of audit has an extensive scope and is widely used across non-governmental and not-for profit organisations, businesses, corporations as well as educational institutions. 

Figure 1 : Where does Audit fit in the Budget Cycle

Why Are Government Budgets Audited?

Audit, in essence, provides a tool to examine if government actions, such as budgetary allocations, scheme designs and implementation are in accordance with the applicable regulations and standards. It is expected to uncover financial discrepancies arising from use of public funds for personal gains, expenditure incurred in inefficient and/or ineffective ways, deficiencies in various processes, and any other case not in the best interest of the public at large. Hence, audit reports are instrumental in providing the public insights into the performance of the government that can enable them to demand greater accountability.

What is the Budget Audit Process?

The process of Audit generally involves an inspection of records and a subsequent publication of an audit report. The prerequisites for the same include the maintenance of all relevant records for the entity/event, and a predefined accounting standard. After the audit report is ready, it is sent to relevant stakeholders, such as ministries and parliamentarians. In most cases, it is also made public.

What are Different Types of Audits?

Based on the subject that is being audited, audits can be broadly classified into three streams, viz. Financial Audit, Regularity (Compliance) Audit, and Performance Audit. Each of these is discussed below. 

Financial Audit

It is a process of scrutinising financial statements (records) to establish whether prescribed accounting standards for financial reporting and disclosures are complied with or not. Audit of Financial Statements involves inspecting whether these statements provide a reasonable assurance that the financial position, results of operations, and cash flows of an audited entity are presented in a true and fair manner, in accordance with prescribed accounting principles.

Compliance Audit

It is meant primarily to ascertain whether the expenditures reported by the government were as per the legislative authorisation through the Budget or not, and whether the expenditures incurred were in conformity with relevant laws, rules and regulations. It involves probing not only the legality of an action taken by a public official or a person using public funds, but also whether the decision or its implementation is according to the law, rules or regulations governing that activity. 

Example: Compliance Audit

Along with government budgets, audits are also done on government funded institutes. One such audit is the Compliance audit. For instance, a compliance audit was done on Sardar Vallabh Bhai Patel National Institute of Technology (SVNIT), Surat. This audit found that SVNIT was not following the appropriate process which resulted in financial loss of revenue of Rs. 74.25 lakhs due to non-compliance of provisions of NIT Act & Statutes. 

Here is an excerpt from the audit report: 

As per Statute 38 of the First Statute of the National Institute of Technology (NIT) read with Section 26 of the NIT Act, 2007, ‘every NIT shall be a residential institution and all students and research scholars shall reside in the hostels and halls of residence built by NIT for the purpose’. In an instance of non-compliance of Statute 38 of the First Statute of the NIT, seat rent was not collected from all the enrolled students not residing in the Hostel, despite the request for the same being rejected by the 39^th BoG. This resulted in loss of revenue to the tune of Rs.74.25 lakh for the period 2012-13 to 2018-19.’

Performance Audit

Performance Audit is an independent assessment of the performance of an organisation, programme, project or an activity in terms of its goals and objectives. It helps to know how far the expected results have been achieved from the use of available resources of money, personnel and material. It is undertaken to assess whether government programmes have achieved the desired objectives efficiently and effectively and at the lowest cost, and whether its benefits are reaching the intended beneficiaries. An evaluation of the economy, efficiency and effectiveness of public spending has come to be known as the 3E's audit.

Example: Performance Audit
A performance audit typically evaluates the implementation of the scheme as well as fund utilisation. The findings are compiled in a report which is then circulated to the department concerned. A performance audit report brings out the major systemic flaws in the scheme and also presents recommendations to address them. There is no fixed rule that a performance audit has to be conducted for all schemes. Usually, the Comptroller & Auditor General (CAG), of India which is the supreme audit institution in India, decides which schemes need to be audited. In some instances, the departments send out a request for a performance audit to be conducted. In deciding the performance audit, the auditor can devise a range of indicators depending upon the nature of schemes. An illustrative list of indicators to measure the effectiveness of Mid-Day Meal Scheme is as follows. 

• Regular provision of mid-day meals
• Lifting of food grains (adequacy)
• Quality of food grains and edible oils in terms of nutrition 
• Extent of budget provision/ utilisation 
• Utilisation of Central funds for building kitchen sheds/schools without kitchen sheds
• Coverage of Schools/Education Guarantee Scheme (EGS)/Alternative & Innovative Education (AIE) centres 
• Availability of drinking water facilities in schools 
• Measuring impact on health
• Monitoring and supervision

These are a few indicators; CAG audit report makes a detailed analysis on various such qualitative aspects. 

All democratic countries generally have an institution independent of the executive that performs audits of the annual accounts of the government. These are known as Supreme Audit Institutions and are national agencies responsible for auditing government revenue and spending. The International Organisation of Supreme Audit Institutions (INTOSAI) generally operates as an umbrella organisation for the external government audit community.

The CAG of India is the supreme audit institution of India, which not only audits the expenditures but also the revenues. The office of the CAG of India works in sync with the Office of Controller General of Accounts (CGA) which is the principal advisor on accounting matters to the Union Government. The CGA is responsible for establishing and managing a technically sound Management Accounting System alongside the preparation and submission of the accounts of the Union Government, exchequer control, and internal audits.

What Are Constitutional Provisions for audits in India?

The Constitution of India provides for the office of the ‘Comptroller and Auditor General of India’. The CAG of India is provided security, stability and independence for execution of duties without fear and favour.

The Constitution clearly spells out the duties and powers of the CAG with respect to audit of accounts of the Union and State governments and the reports to be submitted to the President of India and Governors of States. It also spells out provisions regarding the audit of accounts of municipalities and panchayats, as well as co-operative societies.

The preparation of Union Government accounts is carried out by the Controller General of Accounts (CGA), which is a part of the Ministry of Finance in the Union Government. The CGA prepares a condensed form of Appropriation and Finance Accounts of the Union Government. However, preparation of accounts by the CGA is not the final step. Verification of the accounts for accuracy and completeness is necessary to discover discrepancies, if any, between the expenditure incurred and that which was sanctioned by the Parliament. Hence, the accounts prepared by the CGA are audited by the CAG. The audited accounts are placed on the table of both houses of Parliament along with the CAG report. The report of CAG amounts to an issuance of a certificate. The observations of CAG summarise objections and irregularities in relation to voted and charged expenditures in the budget.
The CAG is responsible for compiling the accounts of the Union and of each State from the initial and subsidiary accounts. These are rendered to the audit and accounts offices under her/his control by the concerned treasuries, offices, or departments responsible for the keeping of such accounts.

What are the Duties of CAG?

For the CAG to carry out audits, there arises a need for data and information. This initial role of creation and maintenance of records is done by the CGA. The CGA is thus responsible for prescribing general principles of Government accounting concerning Union and State Governments, the form of accounts, and framing or revision of rules. It oversees reconciliation of cash balance of the Union Government with Reserve Bank of India in general, and in particular, of Reserve Deposits pertaining to Civil Ministries or Departments. The CGA is also responsible for preparation and consolidation of monthly accounts, besides review of trends of revenue realisation and expenditure. Its other tasks include the preparation of annual accounts showing the annual receipts and disbursements under the respective heads, for the purpose of the Union Government.

The CAG is an Officer appointed by the President under the provisions of the Constitution of India (Articles 148-151). This means that it is independent of the executive, judicial and legislative wings of government, and thus of the political environment. Unlike the CAG, the CGA is not a Constitutional body but part of the Department of Expenditure under the Ministry of Finance, Government of India. The primary responsibility of the CAG is to provide the legislators and through them, to the citizens of the country, independent assurance on the way the government has used and accounted for funds approved by Parliament/State Legislature, as well as insights into the functioning of the tax system. The process of ‘reporting’ (of its findings and opinions) by the CAG of India, therefore, is meant to fulfil an important Constitutional requirement in our country. 

It is the duty of the CAG to audit all expenditure from the Consolidated Fund of India and that of each State and Union Territory having a Legislative Assembly. Its task is to ascertain whether the moneys shown in the accounts as having been disbursed were legally available for and applicable to the service or purpose to which they have been applied or charged, and whether the expenditure conforms to the authority which governs it.  It audits all transactions of the Union and of the States relating to Contingency Funds and Public Accounts; including audit of all trading, manufacturing, profit and loss accounts, balance sheets, and other subsidiary accounts kept in any department of the Union or of a State.

Figure 2 : Functioning of the CAG

Audit offices for Union and State Governments

Figure 3 Audit Offices

Auditing of Local Governments: PRIs and ULBs

With the passing of the 73^rd and 74^th Constitutional Amendments, the Panchayati Raj system was formally extended to all parts of India with the exception of the areas covered by the Sixth Schedule. Consequently, funds, functions and functionaries were devolved to the rural and urban local bodies (Panchayats and Municipalities, respectively). However, financial accountability (utilisation of money according to legal requirements and efficiency in the utilisation of resources) has become an issue. 
In the case of audits, the mechanism of auditing begins with the Director of Local Fund Audit (DLFA) who passes it to the Examiner. The reporting of compliance audit findings is based on the recommendations of the Eleventh Finance Commission (EFC). The CAG is entrusted with the responsibility of technical guidance and supervision of the local bodies.  The local fund auditor, who is generally an officer of the state government, is responsible for the audit of the Panchayati Raj Institutions (PRIs) and Urban Local Bodies (ULBs). In the states of Bihar, Jharkhand and West Bengal, the Examiner of Local Fund Accounts, attached to the office of the Comptroller and Auditor General, is responsible for auditing the accounts of the PRIs and ULBs. The CAG can undertake the audit of PRIs and ULBs, in cases where they are financed by grants or loans from the Consolidated Fund of India or of any state or Union Territory having a legislative assembly under Section 14 of the CAG (Duties, Powers and Conditions of Service) Act, 1971.

How is the Audit Done?

Generally, the auditing involves following steps –

Step-1: The audit team comprising the Audit Officer and Group B and D officers performs an audit and sends its findings to the department concerned (such as education, revenue, or health,). 

Step-2: Audit memos are issued to them and, in case of irregularity/impropriety/inefficiency or anything found to be unsatisfactory, these are sent to the department for a reply. 

Step-3: After receiving replies, a Draft Inspection Report is prepared by the field audit office which is sent to a Group Officer. 

Step-4: The Group Officer prepares the final Audit Inspection Report which is further passed on for comments. 

Step-5: After incorporation of the Audit Paras, it is sent for review to the Head of Department and Administration; in case of irregularity or inefficiency as mentioned above, a reply from the department is awaited. 

Step-6: The final Draft Para (Audit) is then added after which it is sent to the CAG Headquarters/ State CAG Office for filing.

Figure 4: How Auditing is Done

For initial audit and inspection report, for instance for a particular state government for a department, the process is as follows:
The accounts of the state government, maintained at various levels, are audited as per a risk-analysis undertaken for audit planning for the year. Some offices are audited annually, some bi-annually and some once in 3 years or once in 5 years. During the course of the audit, the audit staff would issue “memos” calling upon the Disbursing Officer/ Pay & Accounts Officer/Head of Offices and Controlling Authorities for information on various points. All such objection memos received from the audit are to be attended to promptly and replies sent within a time limit. A register of audit observations has to be maintained by each Drawing and Disbursing Officer/Head of Office in order to have control and watch over audit objections, notes and reviews.

What Are Different Kinds of Reports Produced by CAG in India?

The following are the Audit Reports prepared by the CAG of India. 

1. Union Reports: These contain significant audit findings arising from the compliance audits of financial transactions under various civil grants related to Civil Ministries/Departments of the Union Government. 
2. State Reports: There are several accounting reports e.g.  Finance and Appropriation Accounts of states to assess the fiscal position of the state government and examine budgetary and expenditure controls. These reports also look at the status of compliance with financial rules, procedures, and directives during the current year is done under financial reporting. 
3. Local Bodies Audit Reports: These include financial reporting and auditing of financial transactions of Panchayati Raj Institutions as well as Urban Local Bodies. 
4. Compliance Audit Reports: These compile observations from compliance audits of revenue as well as expenditure of various departments of state governments. 
5. Financial Audit Reports: State financial audit reports assess the financial performance of state governments on the basis of audited accounts. 
6. Performance Audit Reports: These are prepared on the basis of audited accounts to evaluate the financial performance of the state governments in various sectors, such as outcomes in higher education, general, social, economic and revenue sectors including public sector undertakings. 

The CAG of India submits the following reports on the accounts of the state governments and state- owned companies and statutory corporations:

1. Finance Accounts
2. Appropriation Accounts
3. Report of the CAG (Civil)
4. Report of the CAG (Revenue Receipts); and
5. Report of the CAG (Commercial).

Effectively, the report is the only final output that the CAG produces which is later discussed by various committees in the legislature. Therefore, it is of utmost importance that it maintains a high standard of quality, both in terms of accuracy and clarity, as well as timeliness. 

The Processing of Audit Reports

The CAG submits Audit Reports, Appropriation Accounts and Finance Accounts relating to the accounts of the Union to the President, who submits them before each House of Parliament. The same reports and accounts relating to the accounts of states are submitted to the Governors of the states for presentation before the respective legislatures. Separate Audit Reports on all statutory corporations and autonomous bodies are also submitted by the CAG, for which it is the sole auditor. The CAG presents one or more volumes of Audit Reports to Parliament/legislatures of states and Union Territories with legislative assemblies under the following sectors:

Figure 5: CAG and Audit Reports

Does CAG Ensure Governance Accountability through Audits?

The CAG is the formal accountability mechanism of audits. However, it has undergone changes since it came into existence, more so after the introduction of the Five-Year Plans. The Parliament and the citizens were interested to know whether various development and welfare programmes were being implemented efficiently. With the increased focus on programmes sponsored by the Centre, it became crucial to know the details of expenditure (how much and how effectively it was being spent). It was at this juncture that the CAG findings assumed immense importance. Through CAG’s Compliance and Performance Audit Reports, it became possible to get details on how much was spent and the anomalies in the implementation of the programmes. It also threw light on the reasons for delays in executing particular programmes, non-fulfilment of targets, and overspending, besides faults in planning and execution.

In order to enable the representatives of the people (i.e., the Members of Parliament or MPs and Members of Legislative Assembly or MLAs) to exert control over the activities of the administration in different Ministries/Departments, they have been given certain constitutional provisions under which they can directly influence the budgetary processes of the government, as also those of any particular Ministry/Department. These provisions are meant to provide opportunities to the MPs and MLAs to review and critique the performance of a part or the whole of the government, and offer suggestions. 
A Public Audit conducted by the supreme auditing agency is the instrument available to the Parliament and State Legislative Assemblies to hold the ‘Executives’ accountable. This is to ensure that ‘checks and balances’ are maintained and the misuse of public funds and resources is prevented. The Constitution of India has laid down certain provisions regarding the audit process in the country.

CAG and Committees in Parliament

The legislature, apart from sanctioning appropriations, also has the means to ensure that the appropriations have been applied towards the purposes approved and within the limits allowed. In other words, there may be monitoring and evaluation of the resources sanctioned for different schemes/ programmes under the budget. For the sake of this completeness of legislative control, the Parliament constitutes three financial committees, viz., the Public Accounts Committee, the Estimates Committee, and the Committee on Public Undertakings. These Committees are formed on the basis of proportional representation and represent the whole House.  
The membership of these committees is small, usually less than 30 members. Their small size allows the committees ease of mobility across the country to inspect the documents. Under the parliamentary system of India, civil servants have been provided immunity from being examined or cross-examined on the floor of the House. However, they can be summoned by these committees to be present as witnesses in the committee meetings and they can also be cross-examined by the committee members. This provision is an effective instrument for control of the Legislature over the Executive.

Figure 6: CAG and Committees

Public Accounts Committee (PAC)

This is a Parliamentary Committee comprising 22 elected members - 15 from the Lok Sabha and 7 from the Rajya Sabha. All members are elected on an annual basis. Members are elected from both the Houses on the basis of proportional representation of parties or groups in the House. This committee scrutinises the accounts and audit reports prepared by the CAG to verify that the moneys shown as having been disbursed in the accounts were legally available for, and applicable to, the service or purpose for which applied; that the expenditure conforms to the authority which governs it; and that every re-appropriation has been made under the rules framed by a competent authority. 
The Public Accounts Committee also scrutinises two reports of the CAG on revenue receipts related to direct taxes and indirect taxes, respectively. One of the important functions of this committee is to detect whether any money has been spent in excess of the amount granted by the House on a service. The findings of the committee on a subject are contained in its report presented to the Lok Sabha, which is then forwarded to the Ministry/Department concerned. A copy of the report is also laid on the table of the Rajya Sabha. The Ministry/Department is required to take actions on the recommendations contained in the report and then furnish Action Taken replies within six months.

Estimates Committee

This committee comprises 30 members drawn from the Lok Sabha, and is constituted every year. The Chairperson of the committee is appointed by the Speaker from amongst the members of the Lok Sabha elected to the committee as per the norms of proportional representation. The term of office of the members of this committee is one year. The purpose of the Estimates Committee is to ensure that public expenditure is incurred in a judicious manner and that the objectives underlying the plans and schemes are effectively achieved. 

This committee examines in detail the estimates presented to the Lok Sabha, makes appraisals of the plans and programmes, and reviews the performance of public expenditure in various fields. Similar to that of the Public Accounts Committee mentioned above, the report containing the findings of the Estimates Committee on a subject is presented to the Lok Sabha. It is then forwarded to the Ministry/Department concerned which must take the necessary actions and furnish Action Taken replies within six months. 

Committee on Public Undertakings

This committee consists of 22 members – 15 from the Lok Sabha and 7 from the Rajya Sabha, each elected on the basis of proportional representation of the parties. It is charged with the task of scrutinising the reports and accounts of public undertakings, reports of the CAG on such undertakings, and to suggest improvements that could be brought in the various undertakings.

The Department-related Standing Committees (DRSCs)

There are 24 Departmentally Related Standing Committees, which cover all the Ministries/ Departments of the Government of India under their jurisdiction. Each of these committees consists of 31 members - 21 from the Lok Sabha and 10 from the Rajya Sabha, who are nominated by the Speaker of the Lok Sabha and the Chairperson of the Rajya Sabha, respectively. The term of office of these committees is one year. With reference to the Ministries/ Departments under their purview, their functions are:

• Consideration of Demands for Grants; 
• Examination of Bills referred to by the Chairman of the Rajya Sabha or the Speaker of the Lok Sabha as the case may be;
• Consideration of Annual Reports; and 
• Consideration of national basic long-term policy documents presented to the House and referred to the committee by the Chairman of the Rajya Sabha or the Speaker of the Lok Sabha, as the case may be.

These committees do not consider matters related to the day-to-day administration of the Ministries/Departments concerned. Rather, they perform the function of parliamentary surveillance over the administration.

Social Audit is a process in which details of resources, both financial and non-financial, used by public agencies for development initiatives are shared with the general public using public platforms. What distinguishes Social Audits from other audits is public participation, which allows them to enforce accountability and transparency, providing the ultimate users an opportunity to scrutinise development initiatives. 
Social audits are a powerful tool for empowering citizens in understanding their rights and entitlements besides being a critical monitoring and evaluation tool for the administration. Social audit not only provides a formal platform for articulation of public perceptions, but also brings out in minute detail the strengths and weaknesses of the programme. In addition, it facilitates the coming together of various stakeholders on one platform to discuss features of various schemes as well as their implementation aspects in detail. 
The primary focus of the CAG’s performance audits remains government processes; verifying results at the implementation level is secondary. In this regard, the two key constraints facing the CAG are strict evidence requirements (necessary to ensure the credibility of the audit findings) and limited human resources. For instance, the CAG can neither verify every rural road, nor accept unauthenticated oral evidence from beneficiaries. This is facilitated by civil society organisations (CSOs) and social audits. 
The CAG’s audit is an external audit on behalf of the taxpayers. The Union and State Legislatures discuss the matters brought out in the CAG’s audit reports through their respective legislative committees on public accounts and public undertakings, and make recommendations. In a broad sense, therefore, the CAG’s audit itself is a social audit. Yet, it remains a government process largely confined to government officials and government auditors. A social audit, on the other hand, seeks to make the audit process more transparent and take the audit findings to a wider public domain of stakeholders, i.e., users of the government schemes, services and utilities.
The demand for social audit has grown in recent years due to the steady shift in the devolution of Central funds and functions relating to socio-economic schemes to the local tiers of government –PRIs, ULBs, and other special purpose agencies set up by the government for the implementation of specific schemes.
In contrast to the CAG’s audits, social audits are participatory processes through which community members monitor the implementation of government programmes. These are carried out by either village-level vigilance and monitoring committees or community organisations to measure the outputs of social programmes, verify official records, and identify problems in implementation at the grassroots level. Social audits provide a forum for direct feedback from beneficiaries through public hearings – large-scale events at which community members present their audit findings to local officials, who are then given the opportunity to question and respond. Social audits are viewed as a pioneering approach to institutionalising community monitoring, as these involve collaborative efforts of both government and citizens’ groups.
The participation of social auditors in the more formal audits by the CAG has the potential to be mutually beneficial and conducive to larger public interests. Through this, social auditors are likely to benefit by way of finding a place for their work in a wider and formal/legal forum of the CAG of India. On the professional development level, they would also be benefited through their exposure to the techniques and objectives of the audits by the CAG. A space for social audit has been created by the Constitutional Amendments which hold that the accounts of a Gram Panchayat be placed before a Gram Sabha, as well as by the RTI Act, 2005. In a welcome move, the state governments of Rajasthan and Andhra Pradesh have taken the initiative to incorporate social audit as part of their monitoring systems through Gram Sabhas and in partnership with a consortium of NGOs.

How can the general public engage with Budget audits?

There are different ways in which the citizenry can engage with budget audits. First, audit reports are a critical instrument for the same which help them become aware of the performance of the government and demand greater accountability. Second, the active participation of general public in social audits can also go a long way in strengthening this participatory mechanism. In addition, CSOs can also play a significant role in strengthening public engagements with budget audits. Some ways in which this can be done are listed as follows.

• Building citizen literacy on public financial management. 
• Using networks and expertise to detect potential cases of corruption and to report these to audit institutions. 
• Augmenting limited capacity in audit institutions to undertake performance and procurement audits. 
• Monitoring and building pressure on the executive to implement audit recommendations (together with legislatures/parliaments).

Thus, public engagement with audit processes has immense potential for not only enhancing government accountability towards the public but also improving the performance of government programmes and implementation of budgetary policies.