Auditing in Local Bodies
Local bodies are entrusted with specific responsibilities related to local governance, including infrastructure development, public services, social welfare, and economic development, among others. The importance of local bodies is multifaceted, and they play a major role in decentralized administration and effective service delivery. These bodies act as a crucial intermediary between the government and the citizens. The significance of these institutions of self-governance stems from the fact that their establishment was mandated by the enactment of two crucial pieces of legislation i.e., the 73rd and 74th Constitutional Amendment Acts of 1992.
Background of Local Bodies
The 73rd and 74th Constitutional Amendment Act (CAA), 1992 constitutionalized the system of Panchayati Raj Institutions and Municipalities in our country. They added two new parts IX and IX-A to the Constitution of India. It also added two new schedules i.e. Eleventh and Twelfth Schedule which contain the provisions which specify the powers, authority, responsibilities and contains a list of 29 and 18 functional matters of Panchayats and Municipalities, respectively.
This amendment to the Constitution mandated to establish a three-tier Panchayati Raj System and establishment of three kinds of municipalities.
Union / Central Government → State Government → Local-Self Government
Urban Local Bodies (ULBs) or Municipalities
- Municipal Corporation: For a larger urban area
- Municipal Council: For a smaller urban area
- Nagar Panchayat: For a transitional area (rural to urban)
Rural Local Bodies (Panchayati Raj System)
- Zila Parishad: For District level
- Panchayat Samiti / Block Panchayat: For Block level
- Gram Panchayat: For Village level
Audit of Accounts of Local Bodies
With the huge devolution of public funds towards the local bodies of India, there comes a need to assure the public that the grants or public funds are being properly utilised. This requires an examination and assessment of financial transactions, records, operations and compliance with applicable laws and regulations. The need to audit the accounts of local funds hence becomes a crucial aspect to ensure transparency and accountability in operations of local bodies.
The addition of Part IX and IX-A to the Indian Constitution, among other articles, added Article 243 J which deals with Audit of Accounts of Panchayat and Article 243 Z which deals with Audit of Accounts of Municipalities.
The above provisions merely said, ‘The Legislature of a State may, by law, make provisions with respect to the maintenance of accounts by the Panchayats/Municipalities and the auditing of such accounts.’
Legal Framework of Audit in Local Bodies
The amendment of the Constitution through the aforementioned acts granted Union Government, the powers to enact laws on local bodies (Panchayats and Municipalities) and provided a framework for states to bring their existing laws in conformity with the provisions of the 73rd and 74th Constitutional Amendment Acts.
As per the prevailing rules, for the audit of local bodies –
- The Local Fund Auditor, who is generally an officer of the State Government, holds such responsibility, or
- In certain states, the Examiner of Local Fund Accounts, who is an officer of the Comptroller and Auditor General, is responsible for the audit of local body accounts.
The Director Local Fund Audit (DLFA), by whatever name it is known in state, works under the administrative control of State Government while receiving Technical Guidance and Support / Supervision in audit matters from Principal Accountant General who acts as the representative of C&AG.
| S. No. | State | Department | Governing Act / Code |
|---|---|---|---|
| 1 | Rajasthan | Local Fund Audit Department, Rajasthan | Rajasthan Local Fund Audit Act, 1954 and Rules 1955 |
| 2 | Himachal Pradesh | Local Audit Department under Himachal Pradesh State Audit Department | Audit Code of the State of Himachal Pradesh |
| 3 | Uttar Pradesh | Local Fund Audit Department, Uttar Pradesh | Uttar Pradesh Local Fund Audit Act, 1984 |
| 4 | Jammu & Kashmir | Directorate of Local Fund Audit & Pensions under the Finance Department, Jammu & Kashmir | Created in the year 2012 vide Govt. Order No. 70-F of 2012 Dated 20-03-2012 |
| 5 | Madhya Pradesh | Directorate of Local Fund Audit | Madhya Pradesh Local Fund Audit Act, 1973 |
| 6 | Karnataka | Karnataka State Audit and Accounts Department | Karnataka Local Fund Authorities Fiscal Responsibility Act, 2003 |
| 7 | Maharashtra | Directorate, Local Funds Accounts Audit, Maharashtra | Maharashtra Local Fund Audit Act, 1930 |
| 8 | Kerala | Local Self Government Department, Kerala | Kerala Local Fund Audit Act, 1994 |
Analysing the data obtained from the Local Fund Audit Regulations of the sample states in India, it is evident that majority of states have enacted their own Local Fund Audit Acts and established local fund audit departments.
But not all the states have enacted their own acts that govern local body audit. As an example, the state of West Bengal does not have its own Local Fund Audit Department and is instead governed directly by the state-level functionary of the Comptroller and Auditor General (C&AG). In the state of West Bengal, as per the readjustment in May 2023, the Office of Principal Accountant General (Audit), West Bengal under the Indian Audit and Accounts Department, i.e., the state level functionary of the C&AG is mandated to audit local bodies.
Key Challenges in Audit of Local Bodies
In the current scenario, auditors face some challenges during conduct of audit of local bodies. Identifying such challenges is crucial for seeking solutions. These challenges are as follows—
- Diverse Regulations: Local Bodies of different states often have uneven regulations relating to state specific acts that govern them. The auditors are required to obtain a comprehensive understanding of the relevant acts, rules and regulations that govern their operations in the state where audit of local body is to be conducted.
- Limited Resources: Many local bodies have limited financial and human resources, which may result in inadequate accounting systems, recordkeeping, and internal controls. Auditors must navigate these limitations while ensuring the accuracy and reliability of financial information.
- Diverse Revenue Streams: Local bodies receive revenue from multiple sources, including taxes, grants, and fees. Auditors must ensure accurate recording and reporting of these revenues, which can be complicated due to the diversity of sources.
- Complexity of Operations: Local bodies often have complex operations involving various departments, projects, and funding sources, making it challenging for auditors to understand the entirety of their activities.
- Data Availability and Quality: Auditors rely on accurate and reliable data to perform their audit process effectively. However, local bodies may struggle to maintain up-to-date and accurate financial records, which can hinder the audit process and impact the reliability of audit findings.
- Capacity Building: Local bodies may lack the necessary capacity and expertise to implement audit recommendations and improve their financial management practices. Auditors may need to provide additional support and guidance to help local bodies address identified weaknesses and improve their operations.
- Unresolved Discrepancies Between Audit Paragraph and Observations: The discrepancies identified in audit paragraphs are not adequately addressed or resolved in the corresponding observations. As a result, the audit process may lack effectiveness and fail to achieve its objectives of ensuring transparency, accountability, and compliance with regulatory requirements.
- Backlog in Local Body Audits: The issue of accumulation of pending audit tasks and examinations within the local bodies entities are a challenge in various states. This backlog often arises due to various factors such as resource constraints, staffing shortages, complexity of audit processes, and inefficiencies in workflow management. As a result, audits may be delayed, leading to prolonged periods without oversight, potential financial mismanagement, and increased risk of errors or irregularities going undetected.
The challenges highlighted above underscored the necessity for enhancing audit regulations governing local bodies in India.
Strengthening Audit of Local Bodies in India
Strengthening the audit of local bodies is imperative to address various challenges and enhance effectiveness in governance at the grassroots level. One key aspect is to ensure the utilization of funds effectively, as local bodies manage significant financial resources allocated for public welfare. Through robust audit mechanisms, it becomes possible to assess the situation of local bodies comprehensively, identifying areas of improvement and potential risks.
Various stakeholders have lent their support to bolstering the audit processes within local governance entities:
i. Role of Comptroller and Auditor General of India (C&AG)
In 1971, Parliament enacted a crucial legislation known as the Comptroller and Auditor General’s [Duties, Powers, and Conditions of Service (DPC)] Act. The Comptroller and Auditor General (C&AG) while fulfilling its responsibilities has taken an active stance in tackling accountability and standardization concerns related to local bodies. This involved—
- Submitting a Memorandum to the Eleventh Finance Commission (2000-2005), expressing views on the audit and accountability of local bodies following the enactment of the 73rd and 74th CAAs. As a result, the Finance Commission made recommendations in alignment with these concerns.
- C&AG provides Technical Guidance and Support (TGS) to Local Fund Audit. It encompasses providing guidance on audit methodologies, procedures, and standards.
- C&AG offers training and capacity building initiatives for local fund audit staff to enhance their skills and expertise in conducting audits effectively.
ii. Role of Finance Commissions
The Finance Commission has played a significant role in the audit of local bodies in India through several recommendations provided from time to time. These include –
The Eleventh Finance Commission’s recommendations:
- The responsibility for controlling and supervising the maintenance and audit of accounts for all tiers of Panchayats and Urban Local Bodies should be assigned to the C&AG.
- The Department of Local Fund Audit or any other auditing agency should operate under the technical guidance and supervision of the C&AG.
- The C&AG should specify the format for preparing budgets and maintaining accounts for local bodies.
- The audit of local bodies’ accounts should be conducted by the C&AG.
- The audit report of the C&AG regarding Panchayats and Municipalities should be presented before a Committee of the State Legislature.
The Thirteenth Finance Commission recommendations:
- The State Government must put in place an audit system for all the local bodies.
- Technical Guidance and Supervision (TGS) over the audit of all the local bodies shall be entrusted to the Comptroller & Auditor General of India.
- C&AG’s Annual Technical Inspection Report as well as the Annual Report of the Examiner of Local Fund Accounts must be placed before the State Legislative Assembly.
The Fifteenth Finance Commission: Made Audited Financial Statements mandatory for Urban Local Bodies to access its Grants. The State Governments, hence, mandate to get the Financial Statements of Urban Local Bodies audited to comply with the grant conditions.
iii. Role of Central Government – The AuditOnline Mission Mode Project
The Central Government is on the path to modernize the country by taking measures to improve online infrastructure through the Digital India Programme. In a recent development, under Digital India Programme, the Ministry of Panchayati Raj (MoPR) has launched AuditOnline under e-Panchayat Mission Mode Project (e-Panchayat MMP).
AuditOnline is a platform that facilitates simplified audit of accounts at all the three levels of Panchayats. The purpose of launching the platform is to streamline the audit process, promote transparency and accountability in audit of panchayats. It is a centralized platform for conducting audits, managing audit schedules, document findings, and track audit reports. The platform can also be utilized to facilitate Urban Local Bodies and Line Department audits.
The recent data available on the AuditOnline Dashboard indicates the accomplishment for the year 2022-23 (status as on 18/03/2024) as –
Benefits of AuditOnline:
- It enables the government entities to comply with the C&AG’s defined standards and guidelines for audit.
- It ensures tracking and monitoring end to end auditing process including follow-up of audit observations, audit paras and action taken on audit paras.
- The platform maintains past audit records and hence improvises transparency and accountability.
Recommendations for Strengthening Audit Functions
i. Guidance from International Audit Standards (INTOSAI / ISSAI)
Auditing Standards prescribe the norms of principles and practices, which the Auditors are expected to follow in the conduct of Audit. They provide minimum guidance to the Auditor that helps determine the extent of auditing steps and procedures that should be applied in the audit and constitute the criteria or yardstick against which the quality of audit results is evaluated.
As per the Auditing Standards (2nd Edition) released by the Indian Audit and Accounts Department, the auditing standards of the International Organization of Supreme Audit Institutions (INTOSAI) have been suitably adapted with due consideration of the Constitution of India, relevant statutes, and rules for the auditing standards for the Supreme Audit Institution of India (SAI).
INTOSAI has published auditing principles and standards for various types of audits in public sector:
- Financial Audit Principles (ISSAIs 200-299) and Financial Audit Standards (ISSAIs 2000-2899)
- Performance Audit Principles (ISSAIs 300-399) and Performance Audit Standards (ISSAIs 3000-3899)
- Compliance Audit Principles (ISSAIs 400-499) and Compliance Audit Standards (ISSAIs 4000-4899)
The audit shall take guidance from these standards to ensure systematic, thorough, and consistent audit process of local bodies. Some State Governments have already taken steps towards integrating their auditing processes with INTOSAI Standards; for example, the States of Rajasthan and Uttarakhand have revised their auditing manuals/frameworks for conducting audits in local bodies by integrating guidance from INTOSAI standards.
ii. Transition from Traditional Approach to Risk-Based Approach
While the traditional audit approach focuses on thorough examination to ensure adherence to standards and legal requirements, there’s a growing trend of shift towards risk-based auditing that offers a more targeted and efficient approach by focusing resources on areas of greatest concern. Transitioning to a risk-based auditing approach is necessary as it empowers auditors to tailor their audit plans and procedures according to the primary areas of concern, identified through risk assessment practices conducted prior to the audit process of local bodies.
| Parameter | Traditional Approach | Risk-Based Approach |
|---|---|---|
| Focus | Conducts comprehensive auditing covering all aspects | Identifies and prioritizes audit activities based on the associated level of risk |
| Approach | Uniform approach by applying standardized audit procedures | Tailored approach by applying customized audit procedures |
| Assessment | Rely on past audit findings and regulatory requirements | Systematic risk-assessment process |
| Planning | Predefined audit plans | Audit plans are developed based on risk-assessment |
| Reporting | Reports provide general overview of findings | Reports focus on high-risk areas, providing detailed insights |
Benefits of Risk-Based Auditing:
- Focusing on the most significant and risky auditable areas
- Conducting efficient audit activities
- Identifying the risk appropriately
- Affirmative cost-benefit impacts
- Fulfilling the stakeholders’ expectations
iii. Integration of IT Tools and Computer Assisted Audit Techniques (CAATs)
Auditors should resort to utilizing Computer Assisted Audit Techniques (CAATs) and Analytical Auditing Methods to enhance audit procedures in local bodies:
- CAATs leverage advanced technology to automate various aspects of the audit process and enable auditors to perform tasks more efficiently and effectively.
- By employing CAATs and analytical methods, auditors can streamline data analysis, identify anomalies or irregularities in financial records, and conduct more comprehensive risk assessments.
- Additionally, CAATs facilitate the extraction and processing of large volumes of data, allowing auditors to focus their efforts on critical areas while minimizing manual effort and errors.
Several states are already on the path of incorporating IT Tools, such as the establishment of the Audit Management System (AMS) in Rajasthan and Online Audit Management System (OAMS) in Uttarakhand.
iv. Capacity Building
Despite the critical role played by auditors, there exists a gap in their capacity due to inadequate knowledge of recent legislative amendments, lack of technological expertise, and challenges in understanding complex transactions. There is an urgent need for regular training for auditors covering key areas:
- Auditing Procedure and Guidelines adopted by the Government
- Use of newer and advanced IT technologies
- International Auditing Standards
- Recent changes in ecosystem of local bodies
- International best practice
The C&AG has prioritized enhancing audit capabilities of staff within DLFA units across various states by offering consistent training sessions focused on auditing PRIs and ULBs through Technical Guidance and Support.
Conclusion
Enhancing audit practices in local bodies is crucial, considering their significant impact on various aspects of rural and urban life, including employment, public health, sanitation, infrastructure, and education. By strengthening auditing in local bodies, we can better achieve the goals set forth by the 73rd and 74th Constitutional Amendment Acts, which aim to decentralize planning and decision-making authority, empowering citizens at the grassroots level. This will not only promote transparency and accountability but also bolster the foundation of the nation, leading to overall benefits for the country.