Thousands of Crores of government funds are parked each year in government owned companies. CAG allows these funds to become un auditable & hence available for siphoning. Deliberate misinterpretation of Accounting Standards (AS9 ) by Chartered Accountants ( supported by ICAI ) is not a loop hole but a tunnel left open to facilitate corruption. CAG supports them. CAG’s standard of Commercial Audit is embarrassingly poor. The annual blue book that CAG submits to the Parliament of India, on the state of government owned companies, is certainly suspect if not misleading but CAG Is not concerned.

Something that peoples of India do not know & can not even imagine is that CAG is just a glorified Rubber Stamp & nothing more. The following story says it all.

THE STORY IS:

In 2010 I requested CAG to conduct supplementary audit of a government of India company, called EdCIL ( India) Ltd. I submitted prima facie evidence to CAG to the effect that the company’s turnover was not what was published in its annual report. I said the company’s turn over was less. After much persuasion CAG ordered special audit of EDCIL. The audit report of 2010/2011 disagreed with my findings. The auditors said that EdCIL had calculated its revenue correctly. I applied through RTI for full copy of the Report. It was unlawfully & vehemently denied.

I protested very hard against the findings of the Audit Report concerning Revenue of the Company. Finally after several visits & a barrage of letters & phone calls CAG, reluctantly, agreed to repeat the same exercise with a different team. EdCIL was subjected to Supplementary Audit once again. This time the audit report agreed with me. CAG wrote a letter to EDCIL saying that the Company’s turn over was over stated. It was not 86 Crores for the year 2011/2012 but it was only 18 Crores. CAG wrote the following to EdCIL.

As per Accounting Standard 9, in case of service contracts, inter-alia, the revenue is measured by the charges made to customers or clients for services rendered to them as part of the ordinary activities of the enterprise. EdCIL executed 61 projects as service provider for /on behalf of the clients for which it accounted the project expenditure as own expenditure, and the expenditure plus service charges as own revenue in violation of the Accounting Standard 9. In all these cases EdCIL charged the service tax on the service charges as per the service contract. The incorrect accounting resulted in overstatement of above revenue from operations and project expenditure by Rs 68 crore each as detailed below.

In the mean time I had lodged a complaint against the Chartered Accountant of EdCIL for negligence of his duty. CAG’s report & my complaint to ICAI sent shock waves across the community of Chartered Accountants. EdCIL received support from the powerful lobby of Chartered Accountants & the President of ICAI. The Company took an offensive stand & denied any wrong doing. The company responded to CAG by making the following 2 points.

a. The Company was incorporated in the year 1981 and right from the inception of the Company, the same Accounting Policies are being consistently followed. . . . . This is for the first time that CAG has taken this view on Revenue recognition. In the year 2001-02, when the statutory auditor of the company had taken this view, it was negated by the CAG.

b. The Institute of Chartered Accountants of India has also endorsed the view taken by the Company’s Statutory Auditor and the Company on Revenue recognition.

As a result the following year, i.e., in the year 2012/2013 , CAG reversed its position & went back to the earlier position where Commission plus principal was taken as a Revenue. CAG surrendered to the lobby of ICAI. CAG put a spin & said that his 2011-2012 comments on EdCIL were not about AS9 but about service tax on service charges. CAG said the following:

The Revenue Recognition in EDCIL was commented on the basis of levy of service tax on service charges only accruing to the company on execution of various contracts during audit of its annual accounts for the year 2011-2012. In view of this the company started charging service tax on the gross inflow from contracts during the year 2012/2013 and accordingly recognized gross inflow as its own revenue. As such no comments were issued on the accounts of EDCIL for the year 2012/2013.

I did not give up. I continued my protest & I was persistent. I filed a Petition with the Rajya Sabha Petitions Committee. I complained to the Public Undertakings Committee. I complained to the Ministry of Corporate Affairs. I wrote a few nasty letters to Senior officers of the CAG & I created a few scenes whenever they allowed me to enter the building.

Somebody in the CAG’s office must have realised that they were making a fool of themselves & I was not going to give up. CAG pulled back the spin of the Service Tax & for the year 2013/2014 CAG reversed its position back to 2011/2012. CAG wrote the following to EDCIL.

The Company accounted for Revenue during 2013-14 arising from 27 Technical Assistance Projects executed as service provider for/on behalf of the clients. The company accounted for the entire project expenditure amounting to Rs. 40.11 Crore in violation of AS9. . . . The incorrect accounting resulted in overstatement of Project Expenditure & Revenue from operations by Rs. 40.11 Crore.

In the following year 2014/2015 – CAG maintained its position on AS9. CAG wrote to EdCIL that the company had again violated AS9.

CAG’s objections have absolutely no impact on the management of EdCIL. It is business as usual for EdCIL. CAG has expressed his helplessness. I have reported the matter, several times, to the Public Undertakings committee but nothing has happened. The Petitions Committee was given assurances by CAG that things will be set right. But nothing has happened.

Now let us look at the implications.

If the tunnel of corruption that has been dug up by ICAI & supported by CAG, called deliberate misinterpretation of AS9, is closed, EdCIL will be seen as a poorly managed company, that breaks the law for its survival & will not be any decorated ( Mini Ratna ). It will have no money to pay Dividend to the Government. I wouldn’t be surprised if it was found to be actually a loss making company. EdCIL is a scandal.

Let us see why & how?

For the year of 2011/12 EDCIL’s revenue was only 18 Crores. Therefore the first line on the P&L statement of EdCIL for the year 2011/12 should have had an entry only for 18 Crores & not 86 Crores. Automatically the Jurisdiction of Tax audit by the Chartered Account of EdCIL, as per company law, is restricted to only 18 Crores. The 68 Crores that EdCIL has spent on behalf of the Government of India are not part of the Annual Accounts of EdCIL. The Chartered Accountant of EdCIL has no jurisdiction on these 68 Crores for audit because it is not Company’s money. It is government money. Chartered Accountants do not audit Government Funds. CAG does. These 68 Crores are auditable by the Internal Auditor of the Ministry of Human Resources, who has paid this money in the first place & then by the CAG using the standard Compliance / Transaction / Performance audit procedures.

To put it simply the Chartered Accountant of EdCIL is authorized & obliged to audit 18 Crores of EdCIL under the provisions of the Company Law. CAG is authorized & obliged to audit 86 Crores of Government money under the provisions of The Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Amendment ACT, 1971. It is clear like Black & white. But officers of CAG, thousands of Internal Auditors & thousands of company Directors, understand it very well, but they do not want to agree because it suits them to keep the myth going.

EdCIL is a small government company. It has taken 86 Crores out of the Jurisdiction of CAG’s Value for Money Audit in one year. There are hundreds of companies like EdCIL. Collectively they take Thousands of Crores of government funds out of the Jurisdiction of CAG’s audit. CAG is happy because it is that much less headache.