The recent ruling of the Honorable
Supreme Court is a landmark one and has removed, once for all, the doubts on
the constitutional mandate to audit private firms by the CAG so far as it
relates to revenue sharing with the Government. Our long time stand, that an
entity using public resources in its business and sharing revenue with the
Government can be audited by the CAG, has been vindicated by the Honorable Supreme
Court. This was stated by the Comptroller and Auditor General of India, Shri
Shashi Kant Sharma while delivering the inaugural address at the 8th
Annual Summit on “Corporate Frauds - Risk and Prevention under Changing
Paradigm” here today.
The
CAG said that there is no doubt that the institution of the CAG is duty bound
to report to the Parliament in all such matters which involve revenue sharing
with Government on country’s natural resources. Shri Sharma disclosed that the
work on Telecom audit is already in progress and the first report would be
ready before the year end. We would be taking up performance audit of some
ongoing PPP projects shortly, the CAG added.
Removing doubts on expertise of the CAG
to audit PPPs, Shri Sharma said that PPP Audit is not a new area to the
institution of CAG and we have got recognition worldwide and the institution
takes pride in it. So nobody should have any doubt on our expertise on this
area, he said.
The CAG stated that Indian economy would
grow into a mature market economy, which would present opportunities to
maximize profits and help the corporates expand across the globe with
confidence and credibility. The CAG expressed that the captains of Industry
would not want to be known as lynchpins of a crony capitalist economy.
Shri Sharma said that many corporate
tycoons in emerging economies are today accused of making fortunes by “rent
seeking”. They want to grab a bigger slice of the pie, rather than making the
pie bigger. This type of rent seeking is not only unfair but also bad for long
term growth, the CAG said.
Stating categorically that audit by CAG
will not be taken up in a routine manner, Shri Sharma clarified that the CAG
audit is an independent audit which is different from statutory audit or internal
audit. Stating that the companies will have to strengthen their internal
control mechanism and that would be a step in the right direction, CAG said
that there would be protocols to undertake such audits which would be done
keeping in view the risk assessment and impact on public interest. The CAG
asked, why companies should fear such audit if they have nothing to hide, in a
mature market economy, where there is very little scope for manipulations and
fudging.
Following
is the text of the speech of the CAG :-
“Corporate
fraud would remain an undeniable reality of our economy, especially as
financial growth picks up pace and provides more avenues for both entrepreneurs
and fraudsters. Fundamentally, both businessmen and fraudsters are tempted to
their acts for the same reason: to make money. While honest businessman would
try to make money through entrepreneurial ways, the fraudster would try to make
money through dishonest criminal acts. While we need to applaud and support
the honest entrepreneur, it is also equally important for us to be on constant
vigil against fraudsters.
Fraud should be distinguished from
error. The distinguishing factor between fraud and error is whether the
underlying action is intentional or unintentional.
Fraud is an intentional act involving the
use of deception to obtain an unjust or illegal advantage. Fraud, thus, has a
legal or criminal connotation. It may involve manipulation, falsification or
alteration of record or documents. Also, it may be by way of misappropriation
or misapplication of assets, recording of transactions without substances or
misapplication of accounting policies.
Corruption and fraud are not mutually
exclusive. There is, in most cases, a nexus between the two. When management
gets involved in the perpetration of fraud, the activity assumes the proportion
or the additional bearing of corruption.
Both fraud and corruption are without
proper authority and involve breach of trust and therefore are illegal and
irregular. They also involve an element of non-transparent conduct or
behaviour.
Examination of system for detection and
prevention of fraud and corruption is an integral part of all regularity audits
and also of performance audits. When the evidence is clear, audit teams can
come to a conclusion about a suspected fraud and include it in their reports.
Thus, the audit findings can put up red flags which need further investigation
by appropriate agencies.
However, in the present economic
scenario, where government has gradually withdrawn from several economic
activities and handing over those responsibilities to private sector, the very
concept of corporate fraud, has to be expanded to understand what we are
dealing with. And why is it so crucial for us to be awake to the complex realities
of corporate fraud, be it by a devious individual or by companies that aim to
manipulate our regulatory frameworks and market dynamics.
In economies like that of India, we are
witnessing several new avenues of interaction between private enterprises and
the government. These have gone beyond the conventional interactions in terms
of taxes and regulations. These are now strewn across various categories. The
most important is the right given to private parties to manage public resources
such as spectrum, coal and other natural resources. A second type of activity
is where the government, or its commercial arms, have formed joint ventures
with private enterprises for public utilities. The third type is where the
private enterprises have been permitted by the government, under agreement, to
build public roads, or such facilities, and collect toll. There may be a few
more categories where private enterprises have expanded their activity to take
over functions that governments would have discharged in a state controlled
economy.
Indian economy is, thus, witnessing
expansion of private sector role in managing public resources and utilities. It
is a matter of record that numerous Indian and foreign companies have carried
out these activities with high standards of transparency and accountability.
That is what they are expected to do in an open market economy. However, I am
going to focus on the issues in the new economic scenario that CAG auditors
have been flagging over the years, and in the context of recent land mark
judgments of the Delhi High Court and the Supreme Court.
Be it in the audit of the 2 G spectrum
allocation or coal block allocation, be it the construction and management of
Delhi airport, be it related to exploitation of gas and oil fields, we have
found very distinct trends that must be of concern to all of us. In many of
our audits involving private parties we have found evidences that fall into a
pattern – of private players trying to distort competition, upset free market
fairness, and, cause loss to both public exchequer and competitors.
In the coming days, as our economy
further picks up, as more and more people join work force, as governments
reduce their presence in the market place, and as technological breakthroughs
permit exploitation of natural resources in new areas, avenues for private
enterprises would further open up and public interest and fairness would be on
test. I urge the captains of industry to appreciate the fact that Indian
economy has to grow into a mature market economy, which would present
opportunities to maximize your profits and help you expand across the globe
with confidence and credibility. I am certain that you wouldn’t want to be
known as lynchpins of a crony capitalist economy.
Emerging markets throughout the globe are
experiencing, what America saw in the late 19th century. Rent
seeking tycoons accumulated vast fortunes. But between 1900 and 1945, America
began to regulate big business and build a social safety net. A new middle
class started flexing its muscles. People wanted politicians who don’t fill up
their pockets, and business tycoons who compete without favours.
Many of the corporate tycoons, throughout
the emerging economies, are today accused of making fortunes by “rent
seeking”. They want to grab a bigger slice of the pie rather than making the
pie bigger. This is easier in industries that are vulnerable to monopoly, or
that involve licensing or heavy state involvement. Some of the common example
are: Banking, mines, telecom spectrum, utilities, oil and gas, public
infrastructure etc.
Capitalism based on rent seeking is not
just unfair, but also bad for long term growth. In such an environment,
resources are mis-allocated, competition is repressed and dynamic new firms are
stifled by better connected players. And if linked to the financing of
politics, rent heavy capitalism sets a tone at the top that can also let petty
corruption flourish.
There is evidence to suggest that
countries that do well to counter crony capitalism generally have better
institutions. Governments must aim to improve regulation and boost
competition. Further, rules are to be enforced rigoursly so that they are
ignored less freely.
As private public interface grow I am
reasonably certain that the role of CAG and regulators would also expand.
Accountability of the Executive as well as that of private enterprise will
require to be defined and strengthened through sound and effective institutions
which ought to be independent as well as credible.
Institution of CAG enforces such
accountability through Parliament as far as public money and resources are
concerned. The Constitutional mandate of CAG is very well defined and the
institution is capable of meeting the new challenges presented by the emerging
economy. We do not want to cross our boundaries. However, the onus is on all
of us to ensure that no one upsets the public trust and everyone gets a fair
chance.
The recent ruling of the Hon’ble Supreme
Court, which upheld the January 2014 judgement of the Hon’ble High Court,
Delhi, is a land mark one as it has, once for all, removed the doubts on the
constitutional mandate so far as it relates to CAG audit of revenue sharing.
An entity that may be using public resources in its business and sharing revenue
with the Government can be audited by the CAG. Our stand has been the same
since long.
In the wake of the recent judgment, there
was an intense debate in the media mostly well informed but on some points, not
so informed. The most argued objection was that it would have far reaching
consequences as the ruling would extend the scope of CAG audit to other areas
like power, mining, ports, airports, oil exploration etc. It would also apply
to all PPP projects. Some commentators raised doubt on the expertise of CAG
for conducting audit of PPPs. A question is raised that a mandatory audit of
all such contracts as also multiple audits of private firms will involve waste
of management time. Also, the very idea of audit by CAG raises doubt on
veracity of audit done by statutory auditors. It is also argued that opening of
books of account of private firms to the CAG can lead to dampening of
investors’ sentiment.
I would attempt to reply, in brief, to
some of these points. As to the issue of extending the scope of CAG audit, the
interpretation of the constitutional mandate was long overdue and the
imperatives of changing scenario in the economy, which I discussed earlier,
makes it quite obvious that accountability through Parliament must be enforced
on utilization of resources that normally belong to people. I will quote the
observation of the Hon’ble Supreme Court, to place the issue in perspective:-
“CAG’s Examination of the accounts of the
service providers in a revenue sharing contract is extremely important to
ascertain whether there is an unlawful gain to the service provider and an
unlawful loss to the union of India, because the revenue generated out of that
has to be credited to the Consolidated Fund of India. The subject matter, with
which we are concerned, as already indicated, is “spectrum”, a natural
resource, which belongs to the people, therefore, people of this country,
through Parliament should know how its natural resources have been dealt with
by the Union, State or its instrumentalities or even by UAS license holders.
Instances are not rare where even the Executive, at times, acts hand in glove
with license holders, who deal with the natural resources, hence, necessity of
proper parliamentary control over the resources.”
Let there be no doubt that the principle
which is applicable to spectrum, applies to all natural resources which belong
to public and where revenue is to be shared with Government; and CAG is duty
bound to report to the Parliament in all such matters.
In fact, work on telecom audit is already in progress and I am hopeful that our
first report would be ready before the year end. Similarly, a report on gas
and oil exploration will be presented to the Parliament soon. We will be
taking up performance audit of some ongoing PPP projects shortly. None of this
is aimed to harass the private firms, but to uphold the constituti7onal scheme
of accountability.
As to the doubt on the expertise of CAG
to carry out such audit, I can only put such doubts to rest by informing that PPP
audit is not a new area to the institution of CAG. CAG has expertise in
various domains including gas, electricity, transport, infrastructure etc. Our
institutional competence is well recognized, even in international audits, and
the institution takes pride in that. As to the waste of management’s time on
account of multiplicity of audits, let me clarify that CAG audit is an
independent audit which is different from statutory audit or internal audit.
The companies will have to strengthen their internal control mechanism and that
would be a step in the right direction. As you know, the new changes in the
Company Act also enjoin additional responsibilities on the companies to improve
their accountability mechanism. I may, however, like to state very categorically
that the audit by CAG will not be taken up in a routine manner. There would be
protocols for undertaking such audits where the audit objective and scope will
be clearly defined. Further, the mandate does not mean taking up audit in all
cases. It would be done keeping in view the risk assessment as well as impact
on public interest.
It may also be necessary for the
Government to make sensible and simplified changes in the design of contracts
so that incentives to fudge revenue are systematically removed. If better and
sound contracting architecture is put in place and the accountability mechanism
is well defined, transparent and fair, I am sure that audit will not lead to
any discouragement to the investors. Finally, in a mature market economy,
where there is very little scope for manipulations and fudging, why should
companies fear such audit if they have nothing to hide.
To fight corporate fraud in the 360
degree meaning of it, we will have to further strengthen our regulatory and law
enforcement agencies, and step up awareness and sensitize all stakeholders.
Regulators will have to devise better norms and simpler procedures in avenues
for private sector participation. This would ensure healthier competition and
better participation. Law enforcement agencies will have to adopt quicker and
more sophisticated investigation methods so that allegations are sorted out
quickly, and they are not prolonged unnecessarily hindering normal activities.
Above all,
Indian corporate will have to appreciate the realities of the emerging
landscape. We are a young nation, with a median age just above 25 years. We
are a restless nation, where surging youth and deprived sections are angry
about corruption and what seems to be repeated collusions between sections of
government and select private players. We must ensure that corruption and fraud
doesn’t spill out into becoming an issue that would unsettle the growth of the
nation. We must remember that the economic progress that has created a class
of “rent seekers” has also created its nemesis, a new, educated, urban,
taxpaying middle class that is aware of its rights and role, and pushing for a
change for the good of the nation”.
*****
DSM/MJPS/ka