40 Dealing with audit

This is a totally different topic from the recent posts on saving and retirement. Getting back to dealing with the sort of challenges that routinely come up in one’s working career, this one is about dealing with audit, especially in government. People are generally concerned about how the public expenditure is being carried out, because it is about their money, collected through taxes; there is not that much concern about what private people and corporations are up to. Private audit, therefore, is all about certifying the accounts; audit of public offices, however, is about digging for dirt and catching the people on the wrong foot.

As a project director of one of our externally-aided projects, I was unfortunate enough to get involved with a “special audit” or a “performance audit” conducted by the central comptroller and auditor-general (CAG).
Most of the expenditure had already been done by the time I came to be in charge, and so I was mainly occupied with closing the accounts and the performance evaluations, redeploying staff, and generally dealing with such housekeeping operations! The special performance audit was one of these responsibilities.

The audit itself took close on a year, since it  had to cover more than five years’ operations, so you can imagine the patience that we had to muster with the team of auditors practically camping in our office for that length of time.  That’s the first ingredient you need to deal with such external audits: patience.

From what I could understand, the CAG audit proceeds from your own project documents, policy papers, and reports, and tracks the implementation against the targets and norms in your own approved documents, annual programmes, budget approvals, and so on. This means that, as far as they are concerned, they are merely pointing out internal discrepancies based on your own professed objectives and norms, so the onus of explanation is on you, not on the auditors. One result of this is that auditors in the government setup look upon themselves as watchdogs, and do not come to rectify and certify, but to question and challenge. Any discrepancy is grist to their mill, however innocuous it may appear, and even without any imputation of mal-intention or malfeasance. Of course, they do give you the opportunity to clarify and explain, and in many cases they do ‘drop’ the objection at their own level, so that it doesn’t become part of the report presented to the competent authority. So the idea is to try your best to minimize the number of 'paras' that remain in the report for the higher levels.

In my case, we ended up with some 165 detailed audit ‘paras’, that could not be resolved at the audit team’s level, and these ultimately went up to the Public Accounts Committee. So we had to go up before this august committee, made up of sitting legislators under the chairmanship of the senior member from the opposition party (he later became the Chief Minister). So the PAC has no particular stake in dampening the remarks of the audit, and you have your job cut out to deal with the objections.

In many of these oversight committees, at both the state and the central governments, it has been my experience that the chairman or members often ask officials whether the process has been useful and constructive. They usually try to be reasonable and considerate (although there are always the odd members who delight in needling!), and try to sort out the really serious paras from the trivial ones which deserve to be dropped. However, although the officials always hasten to assure them that the process has been enormously instructive and useful (and even essential to safeguard the public interest), I think on balance I would have to say that the way the audit is carried out, it is mostly a considerable waste of time.

The job of the audit party is to point out deficiencies, and this introduces an element of futility to the whole exercise, because the ruling principle often amounts to “damned if you do, and damned if you don’t”.  If they can’t hang you for a wolf, they will hang you for a sheep. So whatever the facts are, you will have to be prepared for some serious homework to draw up your defence.

One example of this fait accompli approach was communicated by one of the auditors when he said that they would record an objection if we overspent, and equally if we underspent in relation to the budget. That is, no credit is given for savings under one item to offset excess spending on some other item. This may not become a very serious thing, though, provided you are able to produce some documents or other evidence that such modifications were found necessary and were agreed to by the competent levels.

Another favourite avenue for raising objections is the percentage-wise expenditure under different heads.  One audit official told me with a sense of satisfaction that they’d hold us liable if we went over the percentage limit or if we went under, regardless of the fact that we were within the overall budget. One particularly absurd example I remember was that the expenditure on operations had grossly exceeded the percentage-wise provision in the project document, but audit was not prepared to concede that this was because there were savings on staff salaries. Because there were no approvals for recruiting additional hands as provided in the project document, the implementing units and offices had managed with their existing personnel, thereby saving a lot of the money provided for extra staff. This came up to the PAC, and that was when I realized that our elected representatives often do not have the basic literacy of arithmetic and percentages and so on. Since they are usually in awe of the accountant general and his staff, they get impressed by these official-sounding computations, and feel that there should be something serious in all the paras. I had to take them step by step through the calculations of percentages, and thus convince them that actually there was no loss to the government, but in fact only a massive saving by refraining from taking on additional staff. This has to be done by drawing parallels from everyday life, if possible quoting proverbs in the local language, and generally taking pains to explain things that would appear self-explanatory. In the case cited above, I took the example of buying computers and saving on extra staff by using the existing people; even though the budget provided for salaries would be saved, the expenditure would appear to be excessive if we went by the auditor’s percentage wise calculations. This is an example of the ‘creative’ auditing that is done, even when it is obvious that there is no real loss to the government, and the objection will have to be dropped in any case at the highest level. But the pain of going through the process gives a sense that there has been a rigorous audit, the PAC is satisfied that the officials have been put through the mill at the hearings, and everybody is satisfied at a job well done. But it is all, I am afraid, a cosiderable waste of time, and a somewhat inane exercise resulting in a seemingly exemplary result, but lacking in any relevance in the real world.

Another example I recall is the pitfall of repeated objections for the same item. I took a long time to understand this myself, and even the audit staff were caught on the wrong foot and could hardly bring themselves to believe it. The matter is like this: the accountant-general keeps some items under objection in every year’s accounts. Due to our pre-occupation with the rush of work, or our lethargy, we had failed to ascertain these objections and sort them out with the AG every year, so that these yearly objection amounts were running against the project entity over the life of the project. But at the time of the CAG’s special audit, all these items were once again listed item-wise as objected amounts. Unbelievable as this sounds, I discovered that the objection items had thereby neatly doubled in magnitude: once at the time of accounts verification each year, and now at the time of special audit.

The problem here is that the project entity would never have been informed of the precise list of objected items each year, since it would have been expected in the normal course that the project office would have got in touch with the accountant-general’s people and have sorted it out. The blunder made by the project office was that they had failed to get each year’s expenditure verified and certified after attending to the objections, within the next year or two. I actually went to the AG’s offices to track down the so-called objection book items of the preceding five years, and was shown the bundles of vouchers received from various offices piled up in shelves up to the ceiling of the room. It was out of the question to actually track down anything! Fortunately, I was able to convince the PAC and the AG that the objected items had been levied twice, and I was also able to convince them of the unreasonableness of many of them (such as the percentage-wise over-runs cited above). At the end of many days of argumentation and presentations at the PAC hearings, I think we were able to whittle it down to a handful of paras (from something like 165!).

Another typical case that comes up repeatedly is the absence of approvals from the competent authorities for buildings and other big-ticket items. The response here was to get the paper work done and tenaciously pursue the files and get the written orders passed (in this case, by the government). The required proceedings have to be drafted and given to the concerned staff, and somebody has to personally camp in the concerned offices and get these things done!

What did I (and hopefully, my colleagues and the AG and PAC members as well) learn from this massive exercise? Firstly, for the implementing offices, the necessity of being vigilant during the course of the work year when the money is being spent! It goes without saying that one should follow due process (tendering, getting estimates approved by the competent authority, exercising supervision and getting the requisite checks and certificates, and so forth). But that’s not the whole story, because audit is seldom limited to financial procedures and records nowadays. Audit is going to look at your project on a wider canvas, where the effectiveness and relevance is going to be assessed.

To take cognizance of these wider aspects, it is essential for the implementors to assiduously read, and even study, the project documents, the operational guidelines, and the various assessment reports, and deal with them through a proper process. If there are deviations from the official project document or approved (sanctioned) budgets, action should be taken to get these deviations discussed and ratified at the appropriate levels or committees. If advance action has to be taken before getting all the approvals (and of course everybody knows that nothing can be achieved merely by sticking to the rule book), everything has to be placed on record, approvals requested in writing, ratification recorded in the minutes of all relevant committees, and the authorized officers pestered personally until something comes back in writing. Annual accounts and audit certificates must be arranged. Mid-course corrections should be made to keep the project on track, or if that is not appropriate, the competent authorities should be informed and revised project targets etc. got approved. Oral assurances are of little use where external audit is concerned, so everything has to be got on record.

In this context, I was amused to read the recent book by the retired CAG of India, Vinod Rai, where he vehemently defends the estimates of notional loss caused by various decisions of the government, running into lakhs of crores (that’s millions of millions!). Obviously the auditors’ accusations had been attacked on various grounds, and the retired CAG was stoutly defending his people in the book. It sounded very much like the sort of defence against the audit paras that we would put up before the ministry and the PAC .  

With all the best will in the world, there will still be unresolved audit paras to deal with, and it is better to have them so that the audit  party also can feel that they have done a good job. The bulk of the paras will probably be dropped before the report is submitted to the  PAC, and what does go up to the PAC can be resolved by patiently presenting the facts.

And do keep copies of all important documents on hand… they may be required at some time in the distant future when ghosts rise up from the ground!

Rai, Vinod. 2014. Not Just an Accountant. The Diary of the Nation's Conscience Keeper. Rupa Publications India Pvt. Ltd., New Delhi. (Filed at DDC 657.45, in case you want to locate it in a library).