1. Public Finance Management - Concepts and Core Principles
Public Finance Management (PFM) deals with resource mobilization and expenditure management in government.
It includes budgeting, prioritization of programs, efficient resource management, and exercising controls.
Financial management in developing countries historically focused on controlling spending agencies through reviews and verification.
Reforms have aimed at improving tax collection, debt and cash management, and budgeting transparency.
Efficient revenue collection is critical, and tax policies should focus on broadening the tax net.
Proper debt and cash management principles should be established for cost-effective funding.
Planning processes at all government levels should be institutionalized and budgeting must prioritize outputs.
Oversight and monitoring are crucial for sound governance, with clear rules on transparency and reporting.
Oversight mechanisms include parliamentary committees, public ombudsman, media, civil society, and an independent auditor-general.
2. Evolution of Budgeting
A. Line Item Budget
Individual financial items grouped by cost centers or departments.
Focus on detailed expenditure ceilings for salaries, allowances, office expenses, etc.
Easy to understand and implement but lacks information on activities and achievements.
B. Performance Budgeting
Reflects organizational goals and performance targets.
Allocates funds based on strategies to achieve objectives.
Indicates how funds spent will lead to outputs and outcomes.
C. Zero-Based Budgeting (ZBB)
Introduced in the 1970s, starts every budget cycle from scratch.
Evaluates each activity's necessity, allocates funds only to relevant activities.
Aims to phase out irrelevant programs, but rarely implemented in full due to complexities.
D. Programme Budgeting and Performance Budgeting
Classification of expenditure into programs based on common objectives.
PPBS aimed at an integrated expenditure management system, closely linked with the budget.
3. Weaknesses in the Budgetary Process
Poor planning and lack of links between policy-making, planning, and budgeting.
Inadequate expenditure control and funding of operations and maintenance.
Discrepancies between the formulated budget and the executed budget.
Weak accounting systems and unreliable flow of budgeted funds to lower levels of government.
Inefficient management of external aid and cash.
Inadequate reporting of financial performance and poorly motivated staff.
Common Elements of Budgetary Reforms:
Medium-term budget frameworks to achieve fiscal consolidation and stability.
Prudent economic assumptions with transparency and sensitivity analysis.
Top-down budgeting techniques, pre-setting limits for each ministry's spending.
Relaxing central input controls, allowing agencies to choose efficient resource mix.
Increased focus on results-based accountability for public sector managers.
Budget transparency through timely release of relevant fiscal information, legislative scrutiny, and involvement of civil society.
4. Core Principles of Reforms
Financial management reforms are part of overall governance reforms.
Sound financial management is the responsibility of all government departments/agencies.
Medium-term plan/budget frameworks and aligning plan budgets and accounts.
Prudent economic assumptions to ensure accurate budgetary estimates.
Top-down budgeting techniques focusing on outcomes rather than inputs.
Transparency and simplicity in budget documents and procedures.
Relaxing central input controls to provide operational autonomy to agencies.
Focus on results and accountability for achieving desired outcomes.
Adopting modern financial management practices, including accrual accounting and IT.
Budgeting to be realistic to maintain credibility.
5. Overview of the Existing Financial Management System in India
The basic framework of the financial management system in India is provided in the Constitution.
The Constitution mandates the presentation of an annual financial statement for the Government of India and State Governments, showing estimated receipts and expenditure.
The financial management system includes appropriations made from the Consolidated Fund of India (or States) to meet the expenditure.
The Constitution outlines the procedure in Parliament for estimates, Appropriation Bills, supplementary, additional or excess grants, votes on account, and exceptional grants.
The financial management system in India maintains three parts with regard to receipts: the Consolidated Fund, the public account, and the Contingency Fund.
The Consolidated Fund holds all revenues received by the government and loans raised.
The public account holds other public moneys received by or on behalf of the government.
The Contingency Fund is established to meet unforeseen expenditure pending authorization by Parliament or the State Legislature.
6. Budgetary Process
Annual Financial Statement: Based on Constitutional provisions and financial rules, each government prepares an Annual Financial Statement, commonly known as the Budget. It shows estimated receipts and expenditure, distinguishing between expenditure charged upon the Consolidated Fund and other expenditure.
Three Parts of Government Accounts: The Budget includes estimates for three separate parts of government accounts - Consolidated Fund of India, Contingency Fund of India, and Public Account.
Demands for Grants: The part of the estimate related to other expenditures is submitted to the Legislature as Demands for Grants, with separate demands for each department or major service. The estimates are gross amounts, and receipts/recoveries are shown as footnotes.
Finance Bill: The Finance Bill, containing annual taxation proposals, is considered and passed by the Legislature after voting on Demands for Grants.
Authorizing Withdrawal of Funds: The Legislature has the power to authorize the withdrawal of moneys from the Consolidated Fund for Vote on Account, Vote of Credit, and Exceptional Grants.
Budget Documents: The Fiscal Responsibility and Budget Management Act requires three statements to be presented to Parliament as part of the budget documents: (a) Macro-economic Framework Statement, (b) Medium-term Fiscal Policy Statement, and (c) Fiscal Policy Strategy Statement.
Macro-economic Framework Statement: Contains an assessment of the economic growth prospects.
Medium-term Fiscal Policy Statement: Indicates three-year rolling targets for fiscal indicators in relation to GDP, such as Revenue Deficit and Fiscal Deficit.
Fiscal Policy Strategy Statement: Outlines the strategic priorities of the Government in the fiscal area for the ensuing year.
7. Appropriation Act
After the Demands have been passed by the Legislature, an Appropriation Bill is introduced to provide for the appropriation out of the Consolidated Fund of India or of the State or of the Union Territory with Legislature for all moneys required to meet:
The Grants made by the Legislature, and
The expenditure charged on the Consolidated Fund, but not exceeding in any case the amount shown in the statement previously laid before the Legislature. (This charged expenditure is referred to as Appropriation).
No money can be withdrawn from the Consolidated Fund until this Bill is passed by the Legislature. Once this Bill is passed, it becomes the Appropriation Act.
8. Form of Accounts
Article 150 of the Constitution grants the President the authority, on the advice of the Comptroller and Auditor General of India, to prescribe the form in which the accounts of the Union and the States should be kept.
The Government Accounting Rules (GAR) of 1990 provide the general principles of government accounting, including the cash system of accounting. Transactions in government accounts are recorded based on actual cash receipts and disbursements during a financial year, except for authorized book adjustments.
In Part I of the accounts, there are two main divisions: Revenue and Capital, Public Debt, Loans. Each division contains sections for Receipt heads and Expenditure heads.
The second division includes sections for Receipt heads (Capital Account), Expenditure heads (Capital Account), and Public Debt, Loans, and Advances. These sections deal with receipts and expenditures of a capital nature, usually funded through borrowed funds, aimed at increasing tangible and permanent assets.
The Public Account also classifies transactions into sectors, sub-sectors, Major Heads of Account, minor heads, and detailed heads. The Major Heads of Account correspond to the 'Functions' of the government, while minor heads identify the 'Programmes' undertaken to achieve the objectives of the respective functions. Sub-heads represent components of a program or detailed heads, indicating the object or nature of expenditure on a scheme, activity, or organization in terms of inputs.
The detailed heads on the expenditure side provide itemized control over expenses, specifying the nature of expenditure, such as salaries, office expenses, grants-in-aid, loans, and investments.
9. Preparation of Accounts
The preparation of accounts in the government involves two important types of accounts: Appropriation Accounts and Finance Accounts.
Appropriation Accounts: Appropriation Accounts are prepared to show the expenditure of the government for each financial year compared with the amounts of the voted grants and charged appropriations for different purposes. These amounts are specified in the schedules appended to the Appropriation Acts passed by the Parliament or Legislature. The purpose of these accounts is to exhibit any excess or savings over the final grant or appropriation for various purposes. In other words, they provide information on whether the actual expenditure matches the approved budget for each purpose. Appropriation Accounts are complementary to the accounts of the annual receipts and disbursements of the government, which are known as Finance Accounts.
Finance Accounts: Finance Accounts are prepared by the respective Accountant General for each Government of a State or Union Territory with a Legislature as soon as the accounts of a financial year are closed. The Finance Accounts present the comprehensive financial results of the government for the year. They include the accounts of receipts and expenditures of the government, financial results disclosed by the revenue and capital accounts, accounts of public debt, and the liability and assets of the government as calculated from the balances recorded in the accounts.
For the Union Government, the Finance Accounts cover transactions of various sectors, including Civil, Railways, Defence, Posts, and Telecommunication.
The Finance Accounts of the Union Government are prepared by the Controller General of Accounts and submitted to the Comptroller and Auditor General for certification. Subsequently, they are transmitted to the President to be laid on the table of the Parliament.
In the case of the State and Union Territory with a Legislature, the respective Governor or Administrator receives the Finance Accounts, and they are then laid before the respective Legislature for scrutiny and approval.
Both Appropriation Accounts and Finance Accounts play a crucial role in providing a detailed view of the government's financial performance and ensuring accountability and transparency in financial management.
10. Audit
Comptroller and Auditor-General (CAG) of India:
Appointed by the President, can only be removed like a judge of the Supreme Court.
Duties and powers prescribed under law by Parliament (The Comptroller and Auditor General's Act, 1971).
Submit reports to the President (Union) or respective Governors (States) for laying before Parliament or State Legislatures.
Auditing Duties of the CAG:
Audit all receipts payable into the Consolidated Fund of India, States, and Union Territories with Legislative Assemblies.
Ensure compliance with rules and procedures for revenue assessment, collection, and allocation.
Audit all expenditures from the Consolidated Fund of India, States, and Union Territories with Legislative Assemblies.
Verify the legality and appropriateness of disbursed funds and conformity with governing authorities.
Audit transactions related to Contingency Funds and Public Accounts of the Union and States.
Audit trading, manufacturing, profit and loss accounts, balance sheets, and subsidiary accounts of government departments.
Audit the accounts of stores and stock in government offices and departments and report on the audited transactions.
11. Internal Audit
Presently, ‘internal audit’ is recognized as an aid to the management for monitoring the financial performance and effectiveness of various programmes, schemes and activities.
In Government of India, internal audit is conducted through the Internal Audit Wings in the Principal Accounts Offices of various Ministries/ Departments.
The scheme of departmentalization of Union Government Accounts provided for setting up an internal audit organization. Accordingly, these were set up in most Union Government Ministries under the Chief Controller of Accounts/Controller of Accounts.
The Secretary of the Ministry/Department acts as the Chief Accounting Authority.
However, it is the Financial Adviser who, for and on behalf of the Secretary, is responsible for internal audit of payments and accounts from the records maintained by the various secretariat and field formations and Pay and Accounts Offices of the Ministry/Department.
12. Flow of Funds Related to Union Government Programmes
Devolution from Finance Commission: Funds transferred to States based on Finance Commission's recommendations (Articles 280 and 281 of the Constitution).
Central Assistance under Plan Funds: States receive Plan funds from the Planning Commission in the form of 'Central Assistance' for the 'Scheme of Financing of States' Annual Plan.
Centrally Sponsored Schemes (CSS): States receive Plan funds through various Union Government Ministries/Departments for implementing CSS.
Mechanisms of Fund Transfer for CSS: Transfer of funds through the design of respective schemes.
Fund Flow Channels: Funds transferred to Consolidated Fund of State Governments and then spent through implementing agencies. Funds also transferred directly to implementing agencies in the States via normal banking channels.
Actual Expenditure under CSS: Expenditure incurred when payments made to beneficiaries or suppliers of goods/services.
Challenges: Lack of proper information system hinders tracking of fund flow and correlation between released amounts and expenditure. Direct transfers result in funds accumulation in the pipeline.
13. Analysis of the Budgetary Process
Input-Based Budget System: Budget outlays not effectively linked to productivity of public expenditure and service delivery.
Conventional Line-Item Budgeting: Focus on ensuring agencies do not exceed specified allocations, financial compliance through detailed input budgeting and expenditure control procedures.
Outcome Budgeting: Recently introduced reform to achieve results and outcomes.
Budget Presentation: Presented to Parliament on a fixed date, usually the last working day of February, except in election years.
General Discussion on Budget: Held after budget presentation, allows discussion of budget as a whole and policy of taxation. Specific points discussed during Demands for Grants or Finance Bill stages.
Departmentally Related Standing Committees: Constituted to examine Demands for Grants, have persuasive value but cannot suggest 'cut motions.'
Cut Motions: Types include Disapproval of Policy Cut, Economy Cut, and Token Cut, used to seek reduction in Demand amounts.
Guillotine: Device to bring debate on financial proposals to an end within a specified time, some Demands voted without discussions.
Appropriation Bill: Introduced in Lok Sabha with President's approval, debate on remaining Demands restricted to matters of public importance or administrative policy implied in the grants covered by the Bill.
14. Weaknesses in the Budgetary System and Implementation
Unrealistic budget estimates: The amounts budgeted are often not realistic. Weakness in preparing proper estimates leads to frequent revisions and supplementary. On the other hand, there are major unspent provisions at the end of the year.
Delay in implementation of projects: Resources are being spread thinly with only token provisions in some cases, often leading to inordinate delays in execution of projects.
Skewed expenditure pattern: The expenditure pattern is skewed, with a major portion getting spent in the last quarter of the financial year, especially in the last month.
Inadequate adherence to the multi-year perspective and missing ‘line of sight’ between plan and budge: Though the Five year Plan provides the basis for multi-year perspective, often ad hoc deviations from it distort the long-term plan objectives. The Plan schemes get dispersed into line-items in the budget estimates and there is no consolidation afterwards – both in the estimates and the final accounts. There is need for alignment between the plan, budgets and accounts.
No correlation between expenditure and actual implementation: The expenditure figures do not reflect actual expenditure made towards receipt of goods and services.
Mis-stating of financial position: Parking of funds by implementing agencies, outside the government accounts portrays an incorrect picture of the financial position of government. This also means that the Government’s financial position is not known with reasonable accuracy at any given point of time.
Ad hoc project announcements: Indiscriminate announcement of projects/schemes not included in the plan/budget is regularly made, often without proper consideration and detailing.
15. How to overcome these weaknesses
To overcome the weaknesses in the budgetary process, the following measures can be implemented:
Realistic Assumptions: Formulate budget estimates based on realistic assumptions to avoid discrepancies between estimates and actuals. Regularly analyze the reasons for gaps and take corrective actions.
Outcome-Based Budgeting: Move towards an outcome-based budgeting approach rather than relying solely on input-based budgeting. Link budget outlays to the expected results and outcomes of public expenditure.
Top-Down Budgeting: Shift from the conventional bottom-up approach to a top-down method, where aggregate expenditure limits are set for each organization/agency. This will promote more focused and efficient allocation of resources.
Rigorous Project Evaluation: Include projects and schemes in the budget only after thorough evaluation. Avoid making token provisions and ensure resources are concentrated on essential projects to achieve meaningful outcomes.
Stop Ad-Hoc Announcements: Avoid ad-hoc announcements of projects and schemes in the budget or on special occasions. Focus on well-planned initiatives that align with the annual plans or mid-term appraisals.
Transparent Audit: Subject budget assumptions and estimates to transparent and independent audits to ensure accountability and accuracy in financial planning.
Regular Review: Conduct regular reviews of budgetary processes and performance to identify shortcomings and implement necessary improvements.
Data-Driven Budgeting: Embrace data-driven decision-making to enhance the accuracy and effectiveness of budget estimates and allocations.
Public Participation: Involve the public and relevant stakeholders in the budget formulation process to gather valuable insights and ensure the budget aligns with the needs and priorities of the citizens.
Long-Term Fiscal Planning: Develop long-term fiscal planning frameworks to promote stability and sustainability in public finances, reducing the reliance on short-term and ad-hoc measures.
16. Outcome Budget
Outcome Budget is a budgeting approach that focuses on tracking and evaluating the results or outcomes of government initiatives and interventions, rather than merely measuring financial inputs or physical outputs.
It aims to establish a clear link between financial allocations and the actual achievements and impacts of government programs. The conversion of 'outlays' (financial resources) into 'outcomes' (end results) involves a comprehensive and evolving process:
Guidelines for Conversion Process:
Defining Specific Outcomes: Clearly define intermediate and final outcomes in measurable and monitorable terms.
Standardizing Unit Cost: Establish unit costs of service delivery to gauge the efficiency and effectiveness of spending.
Benchmarking Quality: Set quality standards for outcomes and services to assess the success of programs.
Capacity Building: Enhance efficiency through capacity building in terms of technology, knowledge, and skills.
Timely Fund Flow: Ensure timely and adequate fund allocation to avoid delays and idle funds.
Monitoring and Evaluation: Implement effective monitoring and evaluation systems to identify areas for improvement and ensure intended outcomes are achieved.
Community Involvement: Engage the community and target groups in feedback mechanisms to enhance service delivery.
Definitions of Terms:
Outlays: Total financial resources allocated for achieving outcomes, including funds from various sources like the government, state governments, public sector undertakings, and public-private partnerships.
Outputs: Measurable physical quantities of goods or services produced through a scheme or program, acting as intermediate results towards achieving outcomes.
Outcomes: End results or impacts of government initiatives, including the quality and effectiveness of goods or services delivered under a scheme or program.
Challenges and Recommendations:
Complexity: Implementing outcome budgeting requires thorough preparation, training, and a step-by-step approach, especially for flagship schemes and national priorities.
Outcome Budgeting enables governments to focus on results, accountability, and better resource allocation by assessing the effectiveness and efficiency of public spending based on the achieved outcomes.
17. Irrational 'Plan - Non-Plan' Distinction Leads to Inefficiency in Resource Utilization
The distinction between Plan and Non-Plan expenditure in the budgeting process has been criticized for various reasons, leading to inefficiencies in resource utilization and budget formulation. Some of the key points are:
Lack of Comprehensive Resource Assessment: The Plan-Non-Plan divide makes it difficult for departments to have a clear and comprehensive idea about the availability of resources at an early stage of budget development. This can result in a lack of proper planning and allocation of resources.
Adverse Effects on Public Services: Viewing non-plan expenditure as less important and subjecting it to cuts can have adverse effects on essential public services, as many vital expenses fall under non-plan categories.
Complexity and Time-Consuming Procedures: The procedures for getting 'in principle' approval from the Planning Commission for new schemes/projects and tying up financial resources are elaborate and time-consuming, limiting the flexibility of departments in proposing new schemes.
Impact on Budget Development: The Plan-Non-Plan distinction brings complexity to the budget formulation process and can restrict departments' ability to allocate resources effectively to meet their objectives.
Repeated Recommendations for Abolishment: Various committees and experts have recommended abolishing the Plan-Non-Plan division over the years, but it hasn't been implemented yet.
Focus on Revenue and Capital Expenditures: Budgeting should focus more on differentiating between revenue and capital expenditures, along with proper disclosures relating to new expenditure proposals.
Flexibility for Departments: Departments should have the flexibility to formulate budgets based on prior indications of resource availability, similar to Public Undertakings, Autonomous Bodies, and Societies, which plan according to overall allocations.
Abolishing the Plan-Non-Plan distinction can lead to more efficient resource allocation and budget development, allowing departments to plan and allocate resources effectively to meet their objectives and deliver better public services.
18. Flow of Funds from the Union to the States - Centrally Sponsored Schemes
CSS Funding Objective: Centrally Sponsored Schemes (CSS) are funded by the Union Government to achieve national objectives, even though they do not fall within the subjects allocated to the Union Government in List I of the Seventh Schedule of the Constitution.
Two Channels of Fund Flow: Funds are transferred either to the Consolidated Fund of the State Governments or directly to implementing agencies in the States through normal banking channels.
Tracking Fund Utilization: Actual expenditure under CSS occurs when payment is made to beneficiaries or suppliers. However, due to a lack of proper information systems, tracking fund flow and correlating released amounts with expenditure made remain uncertain.
Challenges in Accounting: Expenditure incurred on CSS through State Budgets may not be linked accurately unless coding and distinct sub-heads for each CSS are implemented. Advances to implementing agencies and end-use expenditures are not distinguished, and registers are sometimes used instead of account books.
Transparency in Expenditure: Autonomous bodies and NGOs receiving CSS funds should be mandated to capture expenditure under specific CSS and type (end-use, advance, etc.) to ensure transparency.
Real-time Tracking: A system should be implemented to track fund movement through accounts or subsidiary accounts, not just registers.
19. Absence of a System for Managing the Flow of Financial Information
The current system for managing the flow of financial information in government-funded schemes faces several challenges, including lack of tracking fund flow from GOI to spending units, absence of reliable reporting system for utilization of plan scheme funds, and unutilized funds lying in different accounts of implementing agencies. The existing Chart of Accounts is not uniform across agencies and lacks flexibility to capture various budget dimensions.
To overcome these challenges, the government plans to shift to a system of transfer of debits in respect of Centrally Sponsored Schemes (CSS). A Core Accounting System (CAS) will be set up by the Controller General of Accounts (CGA) and linked with the Core Banking System (CBS) of banks. Under the proposed CAS, only sanctions will move down to the final implementing authority, and payments will be made upon authorization of the field level implementing agency. This will create a system where only "authorization to spend" and not "funds to spend" flow through the system, using the existing banking network to transfer authorizations instead of real funds.
The CAS will provide a platform for consolidating accounting data for all plan schemes on a uniform basis, irrespective of the agency involved in implementation. It will also ensure that expenditure is booked in the accounts of the Union Government only when actual payment at the field level occurs.
To implement this system, the CGA, in consultation with the C&AG, will lay down the principles, consider available technology, and put in place a new Chart of Accounts in a time-bound manner. This will enhance financial reporting, monitoring plan scheme implementation, and provide transparency in fund utilization.
20. Development of Financial Information System
A robust financial information system is necessary as it helps in:
Providing timely and reliable information to the decision makers
Providing inputs to control systems
Monitoring financial and physical progress
Ensuring proper utilization of resources
The 2nd Administrative Reforms Commission is of the view that a robust financial information system needs to be created in the government. This system should also make accessible to the public real time data on government expenditure at all levels and should be available in the public domain. This would also be honouring the spirit of the Right to Information which mandates that government organizations should attempt to provide maximum information through voluntary disclosures.
21. Capacity Building
The changes in the accounting and financial management system discussed above would necessitate capability building in not only the accounts and finance personnel but also non-finance personnel. Better skills would allow better preparation of estimates and better management of expenditure.
A lot would require to be done for improving the estimating and forecasting capabilities within Ministries/Departments and implementing agencies. Specially designed and periodic training modules for personnel at different levels need to be designed to meet these needs.
The 2nd ARC is of the view that major reforms in financial management can only be undertaken if capacity of both - individuals and institutions – is improved. For this to happen, a proper programme of training needs to be devised and implemented in a time bound manner.
22. Internal control and audit
The internal control and audit systems in government aim to ensure compliance with rules and regulations, reliability of financial data, and efficient government operations.
Internal control provides the first line of defense against misuse and inefficient use of resources, safeguarding government assets, countering fraud and error, and checking maintenance of accounting records.
Internal audit is a crucial tool for evaluating and improving the internal control system.
However, the current internal audit system faces several challenges, including outdated guidelines, lack of prescribed standards, under-resourcing, shortage of qualified staff, and lack of response to audit reports by auditee units. The reports of internal audit are often routine and lack positive recommendations.
To address these issues, the Second Administrative Reforms Commission (ARC) has made several recommendations:
Establish an Office of the Chief Internal Auditor (CIA) in select Ministries/Departments to carry out internal audit functions, and provide its independence and duties through a statute.
The CIA should be directly responsible to the Secretary of the Department.
Initially, personnel may be inducted from existing accounts cadres, and capacity building needs should be identified.
Formalize modalities to ensure non-duplication of work between internal audit and the Comptroller and Auditor General (C&AG).
Prescribe standards for internal audit by the Office of the C&AG.
Separate accounting functions completely from internal audit.
Establish an Audit Committee in each Ministry/Department, consisting of a Chairperson and two members from outside the government. The committee should oversee both internal and external audits and report annually to the respective Departmentally related Standing Committee of Parliament.
These recommendations aim to strengthen and enhance the effectiveness of internal audit in the government and improve financial accountability and transparency in the use of public resources.
23. External audit and parliamentary control
External audit plays a crucial role in financial management by providing assurance to Parliament/Legislature that public money has been spent for its intended purpose and achieving the desired outcomes. It is a key element in ensuring accountability of the executive to Parliament/Legislature and the public.
Types of Audits:
Performance Audit: Measures the economy, efficiency, and effectiveness of government expenditure, evaluating service quality and performance.
Regularity (Financial) Audit: Checks financial statements for accuracy and compliance with financial rules.
Regularity (Compliance) Audit: Ensures adherence to financial rules and regulations.
IT Audit: Focuses on information technology systems and controls.
Strengths of External Audit in India:
The CAG has a high status enshrined in the Constitution, providing independence and autonomy to public audit.
The scope of external audit is wide, allowing it to respond to changes, reforms, and new initiatives.
The CAG has the power to determine the nature and extent of audit and access to relevant information.
Audit reports are tabled in Parliament/Legislature and become public documents.
Audit manuals and guidelines exist, and standards are framed on international guidelines.
Challenges before the External Audit:
Low number of audit paras examined by the Public Accounts Committee (PAC).
Formal rather than substantive Action Taken Notes on audit paras not discussed in the PAC.
Huge pendency of audit paras in State PACs, reducing their relevance.
Thousands of inspection reports with unattended observations in government departments.
Perception of untimely audit reports, lacking physical verification.
Lack of physical verification to supplement audit findings.
Audit reports being perceived as overly negative, discouraging innovations and risk-taking.
Inadequate synergy/coordination between external audit and internal audit.
External audit not providing assurance on the fair presentation of financial statements.
Limited audit of grants and loans to NGOs.
Encouraging a Collaborative Approach to Public Audit:
Foster better understanding and synergy between government agencies and audit for proper accountability.
Encourage positive approaches from both auditors and auditees for effective collaboration.
Enhance interaction and coordination between the executive and audit at senior levels.
Conduct studies and evaluations of systems, offering constructive suggestions for improvement.
Provide balanced reporting in audit reports, acknowledging good performance along with criticisms.
The Commission recommends enhancing interaction, balanced reporting, and coordination between the executive and the audit to improve public accountability and the effectiveness of external audit.
24. Financial Management in State Governments
Financial management in State Governments requires addressing several key issues to improve fiscal discipline and accountability. Some of these issues and potential solutions are as follows:
Integrated Financial Advisers (FAs): State Governments should introduce the system of FAs in various departments, where FAs would represent the Finance Department. This should be coupled with greater delegation of financial powers to the departments. Capacity building of departments in financial administration should precede these changes.
Multi-year Budgeting: Shifting to multi-year budgeting, with estimates for revenue and expenditure for a period of four years in addition to the year of the budget, would bring about better fiscal discipline and help estimate fund requirements for ongoing projects accurately.
Realistic Estimates and Assumptions: Budget estimates should be based on prudent and realistic economic assumptions to ensure accuracy and avoid undue optimism. Analyzing the gap between estimates and actuals at the end of each financial year will help calibrate economic assumptions for the future.
Avoiding Ad hoc Announcements and Token Provisions: State Governments should refrain from making ad hoc project announcements during high-level visits and instead focus on including essential projects in the annual plans and budgets. Token provisions should be avoided to prevent spreading limited resources thinly and delaying ongoing projects.
Skewed Expenditure Pattern: State Governments should adopt monthly expenditure plans to address the issue of skewed expenditure, where a bulk of spending occurs in the last quarter and particularly in March.
External Audit: Public Accounts Committees (PACs) should prioritize the examination of the latest Audit Report, selecting matters for detailed discussions in a manner that allows completion of scrutiny within one year. To clear arrears, PACs may adopt a phased program to examine outstanding past Audit Reports within two to three years.
Timely Follow-up Action: State Governments may specify time frames for departments to take necessary follow-up actions on the recommendations of the Audit and submit Action Taken Notes (ATNs) to the Accountant General within prescribed limits.
By addressing these issues and implementing the suggested solutions, State Governments can improve financial management, enhance accountability, and ensure effective utilization of public funds.
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