CHAPTER 20

AUDIT OF EXPENDITURE

20.1 Every payment of money on Government account involves three principal processes:

(a) the submission of a claim;

(b) the disbursement of the money claimed; and

It is clear, however, that a disbursing officer must have some criterion whereby he can judge the equity of a claim made and can justify his action in making a payment in satisfaction of it. We have, therefore, to consider what conditions regulate public expenditure.

20.2 The incurring of expenditure from the Consolidated Fund of India or Consolidated Fund of Union Territory with Legislature or the Consolidated Fund of a State is governed by the following essential conditions:

(i) that there should exist sanction, either special or general, accorded by a competent authority, authorizing the expenditure

(ii) that there should be provision of funds authorized by competent authority fixing the limits within which the expenditure can be incurred;

(iii) that the expenditure incurred should conform to the relevant provisions of the Constitution and of the laws made there under and should also be in accordance with the financial rules and regulations framed by competent authority;

(iv) that the expenditure should be incurred with due regard to broad and general principles of financial propriety.

Duty of Audit

20.3 In conducting the audit of expenditure Audit has to see that the administrative authorities comply with the essential conditions mentioned in the preceding paragraphs. Therefore, the audit of expenditure follows the line of these conditions.

20.4 In conducting the audit in respect of the first three conditions mentioned in para 20.2 the auditor performs quasi-judicial functions, in that he has to apply the rules and orders as they stand, irrespective of the position of the person against whom they are enforced. He may not relax or waive the rules, except where he is specially empowered to do so.

Nature of sanction audit

20.5 The power to sanction expenditure from the Consolidated Fund and the Contingency Fund of India including power to dispose of property and stores pertaining to the Union Government is vested by Article 77 (3) of the Constitution in the President whose sanction, given directly or by persons to whom the necessary powers have been delegated, is necessary to all expenditure from that Fund. The power to sanction expenditure from the Consolidated Fund of a State and the Contingency Fund of a State if such a fund is established in any State is like-wise vested by Article 166 (3) of the Constitution in the Governor of the State whose sanction given by himself or by persons to whom the necessary powers have been delegated, is required for expenditure from that the Consolidated or the Contingency Fund of the State. There is similar provision in the Government of Union Territories Act 1963 vesting the authority in the Administrator of the Union Territory. Audit of expenditure should not merely be confined to seeing that the expenditure is covered by a sanction, either general or special, but should extend to satisfy itself that the authority according a financial sanction is competent to do so by virtue of the powers vested in it by the provisions of the Constitution and of the Laws, Rules or Orders made there under or by the rules of delegation of financial authority made by a competent authority and that the sanction is definite and needs no reference to the sanctioning authority itself or to any higher authority. This check is otherwise known as Audit of sanction. Though the duty of audit in this regard is thus very simply stated, the conduct of this audit is complicated and its complexity lies in the knowledge and the correct application of the principles involved. Audit Officers have to conduct this audit with the utmost care and attention as once a sanction is accepted in audit, the expenditure may have to be passed against it for a length of time. In order to conduct the audit of sanctions properly it is, therefore, incumbent upon Audit Officers to make themselves fully conversant with the powers of sanction of the several authorities.

Communication of sanctions to audit

20.6 The Indian Audit and Accounts Department is entitled to receive a copy of an order sanctioning expenditure or a sanction which is otherwise to be enforced in audit from the authority competent to accord the sanction. The procedure of communicating such sanctions to audit is determined by the Rules of Business of the Government concerned.

In the case of petty matters, such as contingent expenditure, sanction may be regarded as being accorded by the signature or the countersignature on a bill; and in such cases it is the duty of Audit to see that no item in the bill actually requires the sanction of an authority higher than the singing or the countersigning officer.

Audit of sanction of the Government of India and of Government of the States

20.7 The audit of financial sanctions and orders of the Government of India and of Governments of the States/Government of Union Territories with Legislatures as well as of authorities subordinate to them devolves on the Audit Officer concerned but sanctions and orders issued with the concurrence of the Comptroller and Auditor General require no further audit check.

Certain guiding principles governing sanction audit

20.8 In the audit of sanctions to expenditure the guiding principles enunciated below are observed:

(i) if the sanctioning authority is vested with full powers in respect of certain class of expenditure, a sanction accorded under those powers can be challenged by Audit only on grounds of propriety;

(ii) if it is vested with powers which may be exercised provided due regard is paid to certain criteria which are expressed in a general form, sanctions accorded under those powers can be challenged by audit-

(a) if the disregard of the criteria is considered to be so serious as to make the sanction perverse, or

(b) if the facts of the case are such as to make the Audit Officer confident that one or more of the criteria have been disregarded.

(iii) if it is vested with powers which are expressed in precise terms, the Audit Officer is bound to ascertain that the order defining its powers is obeyed exactly in every instance;

(iv) for the purpose of financial sanctions, a group of work which forms one project shall be considered as one work and the necessity for obtaining the sanction of a higher authority to a project is not avoided by reason of the fact that the cost of each particular work in the project does not require such sanction;

(v) if any one item of a scheme requires sanction of a higher authority, Audit should hold under objection any expenditure on that item until sanction to it is obtained and in determining whether objection should be raised to expenditure on any other portion of the scheme prior to the receipt of such sanction, Audit should see that the expenditure is not likely to exceed at a later date the limit up to which sanction can be accorded by the original sanctioning authority; and

(vi) in the case of sanctions to new schemes of expenditure, Audit should see whether a satisfactory accounting procedure has been evolved, and the detailed cost and time schedules, physical targets and other objects of the expenditure are duly laid down by the sanctioning authority.

20.9 Recurring charges which are payable on the fulfilment of certain conditions or till the occurrence of a certain event are admitted in audit on receipt of a certificate from the drawing officer to the effect that the necessary conditions have been duly fulfilled or the event has not yet occurred, as the case may be.

20.10 Sanctions with a long period of currency, as well as sanctions of a permanent nature should be reviewed periodically so that, if there is any reason to think that the Administrative Authority concerned should be invited to review the sanction, such action may be taken.

Nature of Audit against provision of Funds

20.11 Audit against provision of funds is directed primarily to ascertaining that the money expended has been applied to the purpose or purposes for which the Grants and Appropriations specified in the Schedule to an Appropriation Act passed under Article 114 or Article 204 of the Constitution were intended to provide and that the amount of expenditure against each grant or appropriation does not exceed the amount included in that Schedule.

20.12 Each Grant or Appropriation specified in the Schedule to an Appropriation Act is a single total sum appropriated to the purpose set out in it. The particulars of a grant in that schedule are, however, based on the detailed estimates drawn up for the information of the Legislature. The distribution in these estimates between the various sub heads and detailed heads (units of appropriation) gives broadly the purposes for which the grant is made and the expenditure should be recorded against the Grant, the sub-heads and detailed heads of the Grant under which provision is made for service.

20.13 Audit has to satisfy itself that the expenditure which is being audited falls within the scope of a Grant or an Appropriation specified in the Schedule to an Appropriation Act and that it is within the amount of that Grant or Appropriation Expenditure in excess of the amount of a Grant or Appropriation as well as expenditure not falling within the scope or intention and Grant or Appropriation unless regularized as laid down in Article 115 or Article 205 of the Constitution, should be treated as unauthorized expenditure within the meaning of Article 114(3) and 204(3) ibid.

The responsibility for watching the progress of expenditure against a Grant or Appropriation devolves on the executive and the executive is ultimately responsible for keeping the expenditure within the Grant or Appropriation. Audit will however render all legitimate assistance to the executive in this matter and should see that suitable and adequate arrangements exist in all departments of Government for the control of expenditure.

Appropriation Audit

20.14 Besides watching that the total expenditure under a Grant or Appropriation does not exceed the amount of that Grant or Appropriation as specified in the Schedule to an Appropriation Act. Audit has the responsibility of ensuring that the total expenditure on each of the sub-heads fixed as units of appropriation under a grant or Appropriation does not exceed he allotment there of as modified by orders of reappropriation passed by competent authority from time to time.

20.15 Unless it is otherwise desired by Government as a special case, or where there is an division of superintending control between departmental authorities under a sub-head appropriation audit check will not be exercised beyond sub-heads of a Grant or Appropriation fixed as units of appropriation.

20.16 The selection of sub-heads of a Grant or Appropriation which are fixed as units of the appropriation, rests with Government, but if the selection of the sub-heads is such as to make it difficult to apply the essential principles of appropriation audit, the Accountant General can legitimately suggest to the Finance Ministry/Department the desirability of revising them in the next year’s estimate.

20.17 Detailed appropriation audit is conducted in two stages:

(i) Sanction audit, i.e. audit of orders of allotment of funds and reappropriation which are to be enforced in audit; and

(ii) Audit of expenditure against allotments. The audit of orders of allotment are reappropriation consists in seeing-

(a) that an authority making allotments under a Grant or Appropriation does not allot amounts in excess of those available under the Grant or Appropriation;

(b) that the amount appropriated is available under the unit from which it is allotted;

(d) that the amount reappropriated is not in respect of an expenditure constituting a ‘New Service’ or a ‘New instrument of Service’.

Note- Reappropriations from one Grant or Appropriation to another Grant or Appropriation are not permissible, as such reappropriations will have the effect of reducing and increasing the amounts of the grants or Appropriation concerned as specified in the schedule to the Appropriation Act and will thus be ultravires of the provisions of the Constitution.

20.18 The Accountant General may also be required to see on behalf of the Executive Government that:

(a) if under the financial rules of the Government a particular object of expenditure requires as specific allotment, all expenditure on it is audited against such allotment; and

(b) if a lump sum allotment is made for a group of items of expenditure of an office, the total expenditure thereon is audited against the lump sum places at the disposal of the disbursing officer for the purpose. When, however, several officers are authorized to incur charges relating to a unit of appropriation against a lump sum allotment placed for the purpose at the disposal of a single higher authority, it devolves upon this authority to watch the progress of expenditure in all the offices and to keep the aggregate charges within the allotment. If the Accountant General is required by Government to audit the charges against the allotment he will comply with the request.

20.19 The responsibility in regard to appropriation audit as mentioned above is confined only where the accounting functions continue to be with the Comptroller and Auditor General. In other cases where the accounts are kept by a separate organization not subordinate to the Comptroller and Auditor General, the responsibility for similar checks vests with that organization.

20.20 The guiding principles in regard to audit against regularity and propriety and Efficiency cum-Performance Audit are incorporated in Chapter 16 and 17.

Audit of contingent expenditure

20.21 The principal duties of Audit in respect of the several classes of contingent charges are explained in the following paragraphs.

Contract contingencies- The rules governing contract contingencies differ in the sphere of different Governments, the principal variations being in the classes of expenditure brought under the contract system and the department to which the contract system and the department to which the system has been extended. In some cases the contract grants are provided direct to the disbursing officers while in others the contract grants are paced at the disposal of controlling officers, who distribute them annually among their subordinates, reserving a small portion for subsequent allotments in case of need. In spite of these and other minor variations the essential features of the system are common to all Governments. No details of the expenditure beyond such totals of the various contract items as may be required for purposes of classification, need be furnished in the bills; and disbursing officers are held personally responsible for any expenditure in excess of the contract grant until the excess is sanctioned by competent authority.

Scale regulated contingencies- Contingencies regulated by scale include such charges as cost of liveries, rewards for destruction of wild animals, batta to witnesses and the like.

The authority prescribing the scale lays down the conditions precedent to its application in each case, making it clear whether special sanction of superior authority is necessary, whether bills should be countersigned before or after payment, and what certificates should support the bills. In accordance with the conditions so laid down, charges regulated by scale may become special, contract, countersigned or fully vouched contingencies and should be audited vouched contingencies and should be audited under the rules applicable to the particular class within which they fall. In addition the Audit Officer should satisfy himself that the charges incurred are in accordance with the scale which governs them.

Special contingencies- In respect of special contingencies where sanction is accorded by Government or departmental controlling authorities, systems and procedures followed in drawing and disbursing offices to limit the expenditure to the sanction and to abide by the terms and conditions, if any, prescribed in the sanctions should be specially seen during local inspections. When a sanctions does not contain an indication of the amount or limit of expenditure sanctioned, enquiry should be made from the authority which issued it and charges should not be admitted in audit until complete sanction is received.

Countersigned contingencies- In cases where bills are countersigned after payment, the money is actually drawn on an abstract bill, and the approval of the superior authority as indicated by its countersignature is subsequently received by Audit on the monthly detailed countersigned bill. Both the abstract bill and the detailed monthly bill require scrutiny in audit. The scrutiny of the abstract bill is limited to seeing that it is signed by an officer authorized to sign such bills, that the summations are correct and that there is nothing extraordinary or unusual in it. The amount of the bill is held under technical objection until the receipt of the detailed monthly bill duly countersigned together with the necessary sub vouchers. The monthly detailed bill is checked carefully and it is seen further that the bill is duly countersigned that the charges included in it cover the amount drawn from the treasury on abstract bills and that details of charges are given where necessary. Differences or disallowances in detailed bill are noted for recovery and adjustments are made if necessary on account of misclassifications, In cases where countersignature is required before payment, there will be no abstract bill, but payment will be made on a detailed bill. The audit checks will be the same as in the case of detailed bills countersigned after payment.

Fully vouched contingencies- Payment of fully vouched contingencies will be made on detailed bills and audit will be conducted as in the case of bills countersigned before payment.

Relative responsibilities of controlling and audit authorities

20.22 A comparison of the relative responsibilities of the controlling officer and the Audit Officer in regard to contingencies shows that the duties of the former are more onerous that those of the later; it is more difficulty to decide whether expenditure is necessary than whether it is unusual and whether rates are reasonable than whether they are apparently extravagant. At the same time the Audit Officer also has to determine, as far as possible, whether the controlling officer is doing his work adequately and this is perhaps his most important duty in respect of contingent expenditure. It is incumbent on Audit to challenge extravagant rates, prices or amounts in charges not otherwise objectionable in character and to refer for orders any item of expenditure which is positively objectionable or even of doubtful propriety. A charge should not, however, be held to require the special sanction of Government merely because it is unusual in the sense that it does not occur at frequent intervals.

Audit of payment against contracts

20.23 Payments charged to contingencies are sometimes made against contracts entered into by Government for supplies of material etc. The contracts placed by Government mainly fall into the following categories

1. Contracts placed on suppliers in India;

2. Contracts placed on suppliers abroad either-

(a) through the agency of the Supply Mission , attached to Indian Embassy at Washington; or

(b) on FOB basis subject to inspection by that Mission; or

(d) through the agency of the Stores Department attached to the High Commission in London.

There are detailed procedures of payments against such contracts and arrangements for their audit (including audit of the contracts themselves).

Verification by Audit Office

20.24 It must be admitted that it would be impossible for Audit to verify the initial facts unless a representative of the Audit Department were present at every act vouched by the certificates that accompany proof of payments. These acts include the payment of the pay and allowances of and the journeys performed by every Government servant, the measurement of all work done by and for the Public Works Department and the verification of Government stores of all description including coin, stamps and other valuables. It is obvious, then, that the Audit Department could not verify the actual facts without a very much large establishment and the extra expenditure thereby involved would undoubtedly be disproportionate to the advantages obtained.

Part played by Countersigning and Controlling Officer

20.25 The recognition of this fact has led to the check exercised by Audit being supplemented to a large extent by executive check. Work done and paid for in the Public Works Department is inspected by superior officers of that department travelling allowance bills are checked by countersigning authorities who are in a position to have knowledge of journeys performed, bills for important contingent expenditure are countersigned by controlling officers who can verify and judge the necessity for such expenditure and the proper rates of payment and can satisfy themselves at inspection that the materials billed for have been purchased.

20.26 As regards the verification of original records relating to the receipt of money, where such receipts are required to be audited by the Indian Audit and Accounts Department, the position is explained in Chapter 19.

20.27 Because this work is not done in the Indian Audit and Accounts Department, there is a tendency in the executive departments to overlook its importance and to consider that it would be better done if it were undertaken by the officers of the Indian Audit and Accounts Department. But, although the latter have the technical training in checking accounts, executive officers have an intimate knowledge of the details of the work and are in a better position to verify the facts and to check the economy in the expenditure passed by them than outside officials would be. Audit has, therefore, to depend largely upon the Executive in this respect. It is, however, the duty of Audit Officers to scrutinize, with reference to the records submitted for Audit, the manner in which the executive officers discharge their financial responsibilities; and in order to supplement this scrutiny, a local inspection, including a test audit of the original records of the treasuries. Public Works divisions and (where possible and desirable) other important account units, is conducted periodically by the Audit Office.

20.28 Audit is, however, not entitled to make independent enquiries among the tax payers or the general public as such action is held to be an encroachment on the functions of the Executive. Audit should confine itself to calling upon the Executive to obtain and furnish the necessary information; and in cases of difficulty, it should confer with the Executive as to the best means of obtaining the evidence which it requires.

Detection of fraud

20.29 It has already been pointed out that commercial audit regards the detection of fraud as one of its main duties. But such detection is almost impossible except at the verification of the original records, and so the detection of fraud in an Audit Office in India is rare. And yet it must not be hastily assumed that this indicates a defect in the system of Government audit in India. The detection of fraud by an executive officer is frequently due to the letter issued by the Audit Office plainly indicating that something is wrong.. Thus in one case, the Audit Officer pointed out that the accounts rendered to him by one Public Works Division were not supported by treasury’s acknowledgements of remittances stated to have been made nor were these acknowledgements received for a long period and that the treasury had also denied receipts of some of the remittances. Subsequent investigation conducted by the department led to the detection of frauds amounting to more than a lakh of rupees over a period of two years.

Numerous similar cases can be quoted showing that action by the Audit Office has led to the detection of fraud. Frauds are also detected at the local inspections which give the expert eye of the trained auditor an opportunity to detect in the original records suspicious factors which could no come to notice in the Audit Office.

20.30 It is essential to investigate frauds care fully because valuable lessons can almost always be learnt from them. There is a tendency to suggest the framing of new rules to prevent each particular fraud. This tendency should be resisted; there are quite enough rules already and if the preventive machinery is made too elaborate, the chances are that it will not work efficiently.

The main point in every fraud investigation must be to ascertain whether the exercise of ordinary common sense, such as one ought to expect from every Government official, and the application of existing rules, would not have rendered the fraud impossible.

The importance of this line of investigation should always be borne in mind, because fraud is prevented far more by punishing the person guilty of the defalcation and the official whose negligence rendered the fraud possible than by adding to the enormous number of rules already in existence. But fraud investigation may sometimes indicate a defective system of check and then the revision of the system is essential.

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