Should private companies be subject to CAG audits?

According to the constitution of India and other legislation, the Comptroller and Auditor General of India (CAG) has the power to conduct audits of the consolidated funds of the central and state governments. Recently, in a writ petition before Delhi High Court, the question arose whether the CAG can exercise this statutory power to conduct an audit of the accounts of private companies that contribute revenue to the consolidated funds. In this case the private companies were providing telecom services under a licensing agreement executed with the central Department of Telecommunications (DoT).

Overreach of mandate?

To the casual onlooker, the audit of accounts of private companies by the CAG might appear to be a clear case of overreach by the CAG of its constitutional mandate, considering specifically that the accounts of private companies are required to be audited periodically according to the principles and procedures prescribed under legislation such as the Companies Act and the Income Tax Act. However, in determining the question before Delhi High Court, the court examined the provisions of the constitution and legislation which establish the powers and duties of the CAG and the provisions of the licensing agreement.

Court’s findings

The court held that since the licensee is required to contribute revenue into the exchequer of the central government, the licensee is under a contractual obligation to maintain its books of account accurately. The terms of the licensing agreement were interpreted to mean that the licensee had expressly undertaken the responsibility for the accounting of the revenue earned and shared with the central government. Therefore, the accounts of the licensee, to the extent of the revenue shared, were held to be the accounts of the central government and consequently the CAG had the power to audit them.

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Unneccessary step?

The judgment has led to an industry-wide debate on whether the CAG has the authority to audit accounts of private companies, particularly the accounts of private companies providing infrastructure services on a public-private partnership basis. Industry players have, while opposing the view taken by the court, questioned the requirement of an additional audit by the CAG given the periodic statutory audits that private companies are required to undertake.

These arguments have merit to the extent that an additional audit by the CAG based on the same principles and procedures of accounting that are followed by the statutory auditors of private companies merely leads to an unnecessary expenditure, duplication of effort and administrative inefficiency.

While valid arguments can be used for both the view taken by Delhi High Court and the concerns raised by industry, the real issue is perhaps not one of which agency should conduct the audit, but the necessity for multiple audits.

Tribunal judgment

The Telecom Disputes Settlement and Appellate Tribunal (TDSAT), in a recent judgment on the same issue, set aside an order of the DoT for an additional audit, through the CAG, of the accounts of a private telecom company. Without getting into the issue of the power of the CAG to audit the accounts of private companies, TDSAT analysed the merits of the licensee’s challenge to the DoT’s order taking into account the facts of the case and the terms of the licensing agreement.

TDSAT observed that under the agreement the licensee was obligated to furnish accurate accounts and details of revenue shared to the licensor and the licensor, if not satisfied with the information provided, had the right to call for further information, including the licensee’s books of account, and order an audit of these accounts by appointing an independent auditor at the cost of the licensee.

TDSAT held that the exercise of this right was contingent on the formation of a reasoned, objective and unbiased opinion by the licensor that the audited accounts submitted by the licensee were incorrect.

Appeals pending

Appeals against the Delhi High Court judgment and the TDSAT order are pending and what will be interesting to see is if the Supreme Court takes a position on the narrow issue of the role of the CAG or on the larger issue of the exercise of contractual rights and legislative powers by the state.

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Akshay Jaitly is a partner at Trilegal and Anuja Tiwari is a senior associate. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad.