CAG and the Audit of Private Firms

The ruling by the Delhi High Court last month that the Comptroller and Auditor General (CAG) had the authority to audit the revenue of private telecom companies opens the door to the CAG audit of companies operating in the infrastructure sector that are either in partnership with the government or hold licences to exploit public resources. The complainant, the Association of Unified Telecom Service Providers of India, has since petitioned the Supreme Court against the judgment. The high court had upheld the CAG’s authority to audit the revenue accounts of private telecom companies who are licensees of the Government of India for providing mobile and cellular telephone services in specified areas. What one is looking at here is the CAG, on the directions of the government, eventually taking up audit of companies in a swathe of areas – power, water, roads and more. In recent weeks, the governments of Delhi and Maharashtra have both given notice of an audit of electricity generating/distributing companies.

The CAG’s organisation (the Director General of Audit, Posts and Telecommunications) had asked the licensee telecom companies to submit their accounts for audit for the purpose of checking whether the prescribed revenue-based licence fee had been correctly calculated. This demand was based on Section 16 of the CAG’s Duties, Powers and Conditions of Service Act 1971, which Parliament had enacted under Article 149 of the Constitution, as also Rule 5 of the Telecom Regulatory Authority of India, Service Providers (Maintenance of Books of Accounts and Other Documents) Rules, 2002. The companies went to the Delhi High Court challenging the CAG’s authority to audit their accounts, a case, which after the high court’s ruling is now before the Supreme Court.

The Supreme Court’s decision must be awaited, but leaving the legal and constitutional issue aside, it is necessary to consider the nature of the relationship between the Government of India and the telecom companies in question, and what the government can or must do in terms of that relationship. The relationship is one of licensor and licensee, with the licensor granting a licence to the licensee to provide certain services to the public in a specified area. This enables the licensee to earn substantial revenues. As a condition of that licence, the licensee is required by the licence agreement to pay an entry fee and an annual fee as a percentage of what is called the “adjusted gross revenue”. To enable the licensor to satisfy itself that the annual fee has been correctly paid, the agreement prescribes the maintenance and submission of accounts, a certificate from the licensee’s auditors, etc. The licensor can call for the submission of books of accounts, prescribe an independent verification of the amount due to the licensor, order an audit and a special audit, and so on. In other words, the licensor is fully enabled to satisfy itself in various ways about the correctness of the fee paid by the licensee.

This stands to reason. If the government confers a revenue-earning capacity on the licensee (a private sector company) and prescribes a fee as a percentage of the revenue so earned, it is that government’s duty to ensure that it duly and correctly collects the fee so prescribed. It is also a contractual right. There is no room for debate here. How will the government as the licensor exercise the right to order an audit and a special audit? It will obviously have to assign that task to an auditor. Again, there is no room for doubt here. Should or can that auditor be the CAG of India? It is not clear why not.

This question can be approached in two different ways: from the perspective of the CAG’s constitutional or statutory powers and responsibilities, or from that of the rights of the licensor under the licence agreement. The first route is before the Supreme Court for a ruling. The second route is being explored here. If the government as licensor can order a regular or special audit, is it constrained to entrust that audit only to an auditor in the private sector? Why can it not use a professional agency associated with the government, and indeed a part of the government?

It is not necessary to invoke Section 16 of the CAG’s Act for this purpose. There is Section 20 under which the government can request the CAG to undertake an audit of an authority or body, but such a request can be made only after consulting the CAG. This is popularly known as “consent audit”. In Section 20 it is not necessary to interpret the term “authority or body”; the Act is clearly not referring to a governmental body here as the entire section is about authorities or bodies that are not within the purview of CAG’s audit.

It is not that the consent audit route should be followed, but merely that the government has the right and the duty to ensure the recovery of the right revenue; that it is empowered to order an audit for this purpose; and that it can (if it wishes to) use the CAG for this purpose on a consent basis. The consent audit in this case (if agreed upon) will of course have to be limited to checking the revenue. All this is based on the presumption that the government as licensor is genuinely interested in exercising its rights and remedies under the licence agreement.

Auditor under scrutiny

The powers of the comptroller and auditor general to audit government revenues are currently under the highest scrutiny. At the start of the year, the Delhi government requested the CAG to audit private power distribution companies. Later, while deciding in favour of a CAG audit of private telecom companies, the Delhi High Court invoked the Supreme Court’s ruling in the 2G case, quoting the doctrine of res communes — that natural resources are vested in trust with the state and that they should be “distributed as best to subserve the common good”.

It is important to note the caveat that limits the CAG’s audit powers. Because the telecom companies in question only have to pay the government a licence fee, the CAG audit will pertain to their “receipts and no more”.

The CAG’s powers to audit tax and non-tax revenues of the government originate from Article 149 of the Constitution, read alongside Section 14 and 16 of the Comptroller and Auditor-General’s (Duties, Powers and Conditions of Service) Act, 1971, and from the regulations on audit and accounts framed in pursuance of Section 23 of the act.

According to Article 149, the CAG “shall perform such duties and exercise such powers in relation to the accounts of the Union and of the states and of any other authority or body as may be prescribed by or under any law made by Parliament”. Audits in the public interest are provided for by Section 20 of the act. Further, the CAG can audit an account that has not been entrusted to it under law if the president, governor of a state or administrator of a Union Territory (UT) requests it to. The CAG may also propose to these functionaries that it should be allowed to audit any body or authority, if it is of the opinion that such an audit is necessary. Such a request may be allowed if it is in the public interest, and after giving the concerned body an opportunity to respond.

More specifically, Section 14 of the act empowers the CAG to audit any body or authority substantially financed by grants or loans from the Consolidated Fund of India (CFI) or of any state or UT having a legislative assembly. The audit shall be subject to the laws applicable to the body or authority, and shall extend to all its receipts and expenditures. Section 16 of the act mandates the CAG to conduct audits of the receipts of governments, giving it no discretion in the matter: “it shall be the duty of the CAG to audit all receipts which are payable into the Consolidated Fund of India and of each state and of each UT having a legislative assembly and to satisfy himself that the rules and procedures in that behalf are designed to secure an effective check on the assessment, collection and proper allocation of revenue and are being duly observed and to make for this purpose such examination of the accounts as he thinks fit and report thereon.”

As per Article 266 of the Constitution, the CFI includes “all revenues received by the government of India” and it shall be the constitutional obligation of the CAG to audit all receipts of the fund. The CAG, therefore, audits all direct and indirect tax revenues and non-tax receipts of the Central and state governments and UTs. The high court judgment has also made it clear that “revenues” means “income of the nation derived from taxes, duties or other sources for the payment of [the] nation’s expenses” and “all the public money which the state collects and receives from whatever source and whatever manner”.

The audit of production sharing contracts has been undertaken by the CAG under Section 16 of the act. Because profit petroleum is a non-tax revenue payable into the CFI, it is the CAG’s constitutional duty to audit it. A separate audit may be done under the accounting procedure of the production sharing contract, if entrusted to the CAG as per Section 20 of the act. Such an audit is intended to enable the government to effectively monitor a contractor’s costs, expenditures, production and income, in order to determine profit petroleum.

Given that a production sharing contract is signed between the government and contractor, all wings of government — Parliament, executive and judiciary — will have access to an audit report produced by the CAG or any other auditor appointed by the government. Confidentiality clauses in the contract are only applicable against third parties, not against Parliament or the other wings of government, including the CAG. The CAG’s auditing powers are derived from its constitutional mandate and, in a parliamentary democracy, are an instrument by which people’s representatives can exercise control over the nation’s receipts and expenditures. Such an audit cannot be equated with or substituted by an audit conducted by chartered accountants or any other agency.