Auditing is the last stage in the public financial management cycle of a government, which comprises policy planning, budgeting, release of funds, monitoring, accounting and auditing. Public sector audit is a means of providing assurance to parliament that public money has been properly spent and is therefore a crucial element in public accountability of governments.
Public sector audit includes an examination of the books of accounts, other documents, stores, assets, etc. relating to receipts and expenditure of the government departments, statutory public authorities and public enterprises with a view to ensuring that rules and orders framed by the competent authorities with regard to financial matters have been followed; that sums due have been properly assessed, realised and brought to account; that expenditure has been incurred with due regularity and propriety; that assets have been properly utilised and safeguarded; that public resources have been used economically, efficiently and effectively; and that the accounts truly represent facts. It is a process of examination and reporting on the accounts, financial system, internal controls, functions and programmes of public sector entities with a view to promoting transparency, accountability, economy, efficiency and effectiveness in public financial management.
Financial versus VFM Audit: Until the 1990s, public sector audit concerned verifying the regularity and propriety of government financial accounts through financial audit. But as the emphasis moved from fiduciary stewardship to operational and functional stewardship, value for money (VFM) or performance audit has been introduced in many countries of the world.
Government audit, therefore, encompasses two main elements of accountability: (a) fiscal accountability - audit of provision of funds, sanctions, compliance and propriety - through financial audit; and (b) managerial accountability - audit of economy, efficiency and effectiveness - through performance or VFM audit.
Ensuring fiscal accountability is a very significant aspect of governance. This involves audit of expenditure (provision of funds and sanctions, adherence to rules and orders, financial propriety), audit of receipts, debts, deposits and remittances, audit of stores and stocks, and other elements in the financial statement of government.
In VFM audit, the auditor examines the performance of an entity, both financial and non-financial, to evaluate the economy, efficiency and effectiveness of resource utilisation by public sector bodies. It may be required under statute (external audit), or organisations may voluntarily institute the process (internal audit). The objective is to report on the extent to which an organisation maximises the service potential (outputs) from available resources (inputs) and processes.
Institutional Context of Public Sector Auditing: Like elsewhere in the world, Parliament has the ultimate responsibility of ensuring financial accountability and transparency in the management of public resources in Bangladesh. The office of the Comptroller and Auditor General (OCAG) is the Supreme Audit Institution (SAI) in the country and is legally responsible for auditing the government accounts and expenditures.
Organisationally, the OCAG in Bangladesh had originally two groups of offices under its jurisdiction. One group (Office of the Controller General of Accounts or OCGA) is responsible for passing bills (including pre-audit) and maintenance of government accounts, and the other group is responsible for conducting statutory audits (post-audit) in the entire public sector. However, the OCGA now operates directly under the administrative control of the Finance Division, and only seeks guidance from the OCAG regarding accounting principles and procedures.
There are now 17 Audit Directorates functionally organised under the OCAG, which are responsible for conducting audits in different categories of public offices. These operate in the following areas: public administration cum constitutional bodies; social security cum welfare; agriculture cum environment; hill tracts, rural development and local bodies; industry, commerce and financial institutions; education, culture and religious affairs; health and family welfare; revenue; housing and infrastructure; finance and appropriation accounts; foreign aided projects; power, energy and natural resources; defence; foreign and expatriate welfare; transport; science, information and technology; and information technology. The outputs of the audits are annually published in the Audit Reports of the OCAG and are placed before Parliament through the President of the Republic. On the basis of findings of the audit reports and discussions on these reports, the Public Accounts Committee (PAC) of Parliament suggests remedial actions for implementation by the concerned ministry, department, or other public sector entity.
At present, the OCAG mainly carries out regulatory and certification audit of all government agencies, state-owned enterprises (SOEs) and projects. These conventional compliance/financial audits are meant to detect deviations from rules or any losses of public money through negligence or fraud. To a lesser degree, these audits are also used to detect the misuse and waste of public resources.
Performance audit was formally inducted into the audit portfolio of OCAG through the establishment of the Performance Audit Directorate in 2005. The main responsibility assigned to this directorate is enhancement of performance audit capability of OCAG through: providing advice to other audit directorates; supervising performance audit work of other audit directorates; conducting performance audits; working as a research wing of OCAG for improving audit methodology; developing training modules and delivering training; and developing quality checklists. A total of 22 performance audit reports have so far been submitted to Parliament by OCAG since 1999, but records show that the activities and outputs of the performance audit directorate have remained stagnant during the past decade.
Legal Framework of Public Sector Auditing: The OCAG has both constitutional and legal mandate in Bangladesh. Articles 127 to 132 of the Constitution stipulates the establishment of the office of auditor-general, functions of auditor-general, terms of office of auditor-general, acting auditor-general, form and manner of keeping public accounts, and reports of auditor-general to be places before parliament. Article 128 (1) states: "The public accounts of the Republic and of all courts of law and all authorities and offices of the government shall be audited and reported on by the Auditor-General and for that purpose he or any person authorised by him in that behalf shall have access to all records, books, vouchers, documents, cash, stamps, securities, stores or other government property in the possession of any person in the service of the republic." Article 128(4) says: "The Auditor-General, in the exercise of his functions under clause (1), shall not be subject to the direction or control of any other person or authority."
The relevant laws for the Auditor-General passed by parliament are the CAG Additional Functions Act, 1974 and the CAG (Additional Functions) (Amendment) Act 1975. They authorise the CAG to certify appropriation and finance accounts, and audit the accounts of statutory public bodies. This law also tasks the OCAG with the responsibility of keeping government accounts, which is not being followed now as the Office of Controller General of Accounts (OCGA) currently keeps government accounts independent of OCAG, and operates directly under the control of Finance Division.
Critical Evaluation of Government Audit Process: In the publication 'Corruption in Bangladesh: Costs and Cures' (2000), the World Bank made the following comments on the state of government's financial management in Bangladesh, "Since financial and management controls within the government are weak, the public accounts presented to parliament are inadequate, unreliable and almost always late. According to the OCAG's 1998 Report: for all practical purposes, no internal control system exists in the ministries. This lack of internal control is a weakness that goes to the heart of fraud, waste and abuse in the public sector. Although the OCAG is supposed to be independent, it operates as a department under the Ministry of Finance. - - - This lack of independence weakens parliamentary control".
The audit reports of the OCAG do not offer satisfactory ex-post checks over the spending agencies. The World Bank (Bangladesh: Government that works: Reforming the public sector, 1996) cites a number of reasons for this:
(a) Weak staff skills. The office of OCAG does not have a single professionally accredited-chartered accountant.
(b) The use of outmoded concepts and procedures. The audit function is viewed as a means of detecting fraud and irregularities rather than as a management control function. The focus is to verify transactions regardless of their value. And although performance or 'value for money' audit is mentioned in the Audit Manual, resource constraints make this task difficult to perform.
(c) There are delays in issuing reports - mainly due to shortages of qualified staffs and other resources.
(d) The reports lack comprehensiveness and are of poor quality. These reflect inadequacies in the qualifications and trainings of staffs at the OCAG and in agencies that provide audit information.
(e) There is inadequate attention to follow-up action. When implementing agencies deviate from audit rules, they are not subjected to speedy and effective sanctions.
The following have been identified as key constraints in the public sector audit process of Bangladesh:
I. Lack of independence. Although the Constitution of the country is very specific about the independence of the OCAG, the Rules of Business of the government have subjected it to bureaucratic control by making it an attached department of the Ministry of Finance. The two main elements of independence - personnel and financial management - are subject to strict control of the Ministries of Public Administration and Finance. The revised Rules of Business also require submission of audit reports via the Prime Minister, which contradicts not only the basic tenets of auditing standards, but also the provisions of the Constitution.
The extensive influence of the executive branch over the OCAG was quite evident recently when the entity issued an office order in June 2020 whereby all 'ordinary audit objections' between 1971-72 and 2009-10 financial years have been deemed and certified as being resolved with the exception of those instances which are under the purview of courts. Critics argue that many cases of theft, embezzlement, excess payments, non-payment of taxes, etc. have been unduly pardoned through this sweeping and indiscriminate measure.
II. Human resource constraint. Auditing is a professional job, which can be efficiently performed only by qualified and educated professionals. The civil servants recruited through competitive examination for auditing jobs at OCAG are so insufficient in number that they are unable to even properly supervise the audit teams. This lopsided proportion of professionals is seldom found in the SAIs of other countries, where the majority of personnel are highly educated professionals. In many countries of the world, the OCAG has the power to hire external consultants as and when required, especially to carry out specialised and technical jobs. The OCAG of Bangladesh has limited power to hire professional personnel from outside, which restricts its capacity to undertake quality auditing.
III. Non-cooperation of the auditees and lack of appropriate communication strategy. There are frequent delays in finalising audit findings due to lack of prompt response from the auditee organisations.
Recommendations for Improving Public Sector Auditing: There are three goals of public accountability: control of the abuse and misuse of public authority; assurance in respect to the use of public resources and adherence to law cum public service values; and, encouragement and promotion of learning in the pursuit of continuous improvement in governance and public management.
The above considerations also apply to the concept of public sector auditing. The traditional financial audit, focusing on fiscal accountability, may be seen to be linked to the first two purposes; and VFM audit (related to managerial accountability) is relevant for the third objective. However, if scarce resources are devoted to VFM audit at the expense of financial audit, particularly where capacity is limited, the result may be non-fulfilment of all three purposes. Therefore, for countries like Bangladesh with weak institutional capacity and dearth of resources for public sector audit, the best option would be to prioritise the building of capacity and institutional framework that would ensure effective financial controls and financial audit.
Based on the above discussions the following measures may be taken to improve the existing system of public sector audit in Bangladesh, some of which have been recommended by the World Bank as well (Bangladesh Public Sector Accounting and Auditing: A Comparison to International Standards, 2007):
(a) An updated National Audit Act should be enacted by replacing the existing 'The Comptroller and Auditor General (Additional Functions) Act, 1974'. It should provide an improved statutory framework in line with the INTOSAI (International Organization of Supreme Audit Institutions) auditing standards that would be needed for a modern audit function. It should also contain an adequate 'offences clause', as full cooperation by auditees and ethical behaviour of auditors are essential for effective audit.
(b) The new National Audit Act should adopt international standards on auditing and ensure effective independence of OCAG.
(c) More statutorily independent arrangements for staffing and budgeting should be put in place through the National Audit Act in order to improve the availability of resources to the OCAG. The OCAG officers and staffs are now under the administrative control of the Finance Division, which controls the appointment, promotion, and disciplinary action for OCAG personnel. The independence of OCAG as stipulated by the Constitution has been jeopardised through this practice. Instead, the OCAG should be separated from the executive branch and remain attached to Parliament.
(d) The law should provide an environment in which resources are adequate for both regularity and performance audit mandate. The qualified staffs for OCAG need to be increased even through lateral recruitment alongside introduction of greater flexibility in remuneration. Thousands of clerical staffs need to be phased out and support facilities should be modernised.
(e) Direct recruitment of auditing firms by the OCAG, PIUs and implementing agencies should be allowed as a substitute for audit by the OCAG, which suffers from shortage of skilled manpower.
(f) The technical and professional competence of the OCAG should be strengthened in order to improve its operational capacity for producing and disseminating quality audit reports that meet international standards and serve the need of the stakeholders. Historically, the OCAG has mainly concentrated on compliance audits required for proper execution of the budget. It now needs to expend resources and training for enhancing in-house capacity for financial, performance, forensic, environmental and information technology audits.
(g) The training programmes, both foreign and domestic, should be strengthened in conjunction with professional bodies. The OCAG should also implement a continuing professional development programme for its professional personnel.
(h) The pre-audit function of OCGA should be continued, as it serves as a preliminary check against irregularities, deviations from rules, and potential corruption, thereby ensuring checks and balance in public financial management. Unrestrained power in the hands of the executive branch in matters of public spending cannot bode well for fiscal discipline in the country.
(i) In addition to the above, establishment of an internal audit function may be considered for implementation in appropriate government departments/ministries, which should incorporate internal control cum risk management. All departments should have formally constituted audit committees to be chaired by a person from outside the department. The government bodies should have access to well-resourced and independent internal auditors, reporting to the audit committees. These are likely to improve performance and act as effective checks against all-pervasive corruption observed in the public sector of Bangladesh.
A longer term framework is required for full-fledged and comprehensive performance audit in Bangladesh in a planned and cohesive manner. However, the management culture needed for yielding real benefits out of that exercise may take even longer to inculcate. Bangladesh should, therefore, concentrate more on consolidating and improving the existing system of public sector financial audit for the short term after bringing reforms to the existing laws, rules, regulations and policies by adhering to international standards and global practices. At the same time, care should be taken to maintain the autonomy of public sector audit function by upholding the complete independence of OCAG as mandated by the Constitution.
Dr. Helal Uddin Ahmed is a retired Additional Secretary and former Editor of Bangladesh Quarterly, holding a master's degree in Government Financial Management from the University of Ulster, UK.
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