CAG and Commercial Audit – A Peep into History
STRANGE as it may sound, the CAG was originally of the opinion that the Government India had no business to start commercial enterprises and Government Companies were constituted unconstitutionally!
The Commercial Audit in the Indian Audit Department was set up in 1925 when a Chartered Accountant selected by the Secretary of State for India joined as Director of Commercial Audit in the AG's office. Somewhere down the line, this practice was discontinued.
At the time of independence, there were very few commercial concerns of the Government of India like Posts and Telegraphs, Government Railways, Ordnance factories, All India Radio…. They were run like departments of the Government.
In 1951, the then CAG Narahari Rao revived commercial audit by inducting a Controller of Commercial Audit in his office.
The Government of India decided to organise industrial undertakings as Limited Companies under the Companies Act to be managed by Boards of Directors appointed by the Government.
The CAG objected. It pointed out that:
"Industry is a State subject and a special legislation of Parliament was necessary under entry 7 or 52 of List I, Seventh Schedule, before the Union Government undertook, participated in or controlled an industry. And the withdrawal of moneys from the Consolidated Fund for the purpose was not constitutional. The formation of private companies under the Indian Companies Act for the management of Governmental industrial undertakings financed from the Consolidated Fund whittled away Parliamentary control over public money. Private companies would not be subject to the same degree of Parliamentary control, even though they were financed by Government out of funds released from the Consolidated Fund and not by private share capital.
The CAG would not have any automatic right to audit such a company, and it would be scarcely in accordance with the Constitution: that large sums of public money should be taken out of Parliamentary control, a substantial part of which was exercised on its behalf by the CAG.
Any request of the company to the CAG to be the Auditor, if necessary, by incorporating suitable provisions in its Articles of Association would be neither proper nor binding as the CAG's duties and functions were prescribed by Parliament, and cannot be regulated by the Articles of Association of a company. Furthermore, even if he undertook audit on a consent basis, on payment of fees, he can only submit his Audit Report to the company, and not to Parliament through the President. Parliament cannot watch through the PAC the regularity of the operations and the financial results of any such company".
While the CAG did not consider the investment constitutional and felt further legislation was necessary, and stuck to his view that the formation of a Private Company Limited without a specific statute authorising it was contrary to the Constitution, he agreed to conduct the audit of the accounts of the factory on the consideration that by an improper diversion of funds it should not escape his audit scrutiny.
FRAUD ON STATUTE: V. Narahari Rao informed the Public Accounts Committee in December 1952 that the formation of private companies under the Indian Companies Act for the management of government industrial undertakings from the Consolidated Fund were, in his opinion, a fraud on the Companies Act and also on the Constitution, because money cannot be taken away from the Consolidated Fund for the establishment and transformation of certain concerns into private companies in the name of the President and Secretary to the Government. Conversion of a government concern into a private company solely by executive action was unconstitutional.
A.K. Chanda, the next CAG did not fully share the views of his predecessor regarding the legality of the company form of management and preferred to accept the opinion of the Attorney General, who held it intra vires of the provisions of Company Law:
In the initial allocations for the share capital of these enterprises, the members of Parliament did get an opportunity for discussing the investment.
Then came THE INDIAN COMPANIES ACT, 1956, which in Section 619 stipulated:-
(2) The auditor of a Government company shall be appointed or reappointed by the Central Government on the advice of the CAG of India :
(3) The Comptroller and Auditor General of India shall have power-
(a) to direct the manner in which the company's accounts shall be audited by the auditor appointed in pursuance of sub - section (2) and to give such auditor instructions in regard to any matter relating to the performance of his functions as such;
(b) to conduct a supplementary or test audit of the company's accounts by such person or persons as he may authorise in this behalf; and for the purposes of such audit, to require information or additional information to be furnished to any person or persons, and in such form, as the CAG may, by general or special order, direct.
So, in most cases, Audit by the CAG is by invitation - only after accepting the invitation, he doesn't behave like a guest!