Financial Accountability, Accounts and Audit: CAG, PAC and Performance Audit

Financial Administration: Monetary and fiscal policies; Public borrowings and public debt; Budgets – types and forms; Budgetary process; Financial accountability; Accounts and audit.

This article: Meaning and forms of financial accountability and the accountability chain; internal financial control (Finance Ministry, Integrated Financial Advisers, Chief Accounting Authority, Chief Controller of Accounts, internal audit); parliamentary financial committees (PAC, Estimates Committee, COPU); separation of accounts from audit (1976) and the Controller General of Accounts; structure and classification of government accounts; cash and accrual accounting; Finance and Appropriation Accounts; PFMS; meaning and types of audit (regularity, propriety, financial, performance, IT, environmental, social); the CAG (Articles 148–151, the 1971 Act, independence, major reports, limits, reforms); the UK, US, French and board models of public audit; INTOSAI and the Lima Declaration; principal–agent theory, the Friedrich–Finer debate and NPM’s turn to performance audit.

Official Syllabus: Paper I · Unit 1-12 Financial Administration

Financial accountability is the duty of the executive to answer for every rupee it raises and spends: to the legislature that authorised the money, to the auditor who checks it, and ultimately to the citizen who paid it. A budget is only a promise; accounts record what was actually done with the money, and audit tells Parliament whether the promise was kept, legally, wisely and with results. Without these two instruments the “power of the purse”, the oldest weapon of representative government, would end the day the budget is passed.

• The other two articles of this unit cover monetary and fiscal policy and public debt, and budgets and the budgetary process (the ex ante stage, when Parliament grants money). This article covers the ex post stage: how the spending is controlled inside the executive, recorded in accounts, audited, and examined by Parliament’s financial committees.
• The general theory of accountability (legislative, executive, judicial and citizen control) is in the articles on accountability and control; social audit is treated fully in the article on Citizen’s Charters, RTI and social audit. Here they appear only as bridges.

1. Financial Accountability: Meaning, Forms and the Chain

1.1 Meaning

• Financial accountability is the obligation of those who raise, hold and spend public money to render an account of it to an authority that can examine, judge and sanction them.
  • It has two parts: answerability (the duty to give information and justify decisions) and enforceability (the possibility of correction or penalty).
  • In a parliamentary democracy the executive spends, but the legislature authorises; accountability closes the loop between the two.
• It answers three questions, which correspond to the three historic layers of audit:
  • Legality (regularity): was the money spent only on what Parliament voted, within the amount voted, with proper sanction?
  • Propriety: was it spent with the wisdom, faithfulness and economy of a prudent person spending his own money?
  • Performance: did the spending achieve its objectives economically, efficiently and effectively?
• A fourth, newer layer is fiscal transparency: are all liabilities (borrowings off the budget, guarantees, pension commitments) disclosed, so that the true fiscal position is visible?

1.2 Three forms of financial accountability

The accountability of public money runs through three channels that work in sequence. Each has its own institutions and its own limits.

Form	Who holds whom to account	Main instruments	Nature
Executive (internal)	Finance Ministry and departmental heads over spending units	Expenditure sanction, Integrated Financial Advisers, Pay and Accounts Offices, internal audit, re-appropriation rules	Continuous, preventive, hierarchical
Legislative	Parliament over the executive	Budget vote, cut motions, questions, PAC, Estimates Committee, COPU, standing committees	Ex ante (grant) and ex post (review)
Audit	An independent auditor on behalf of Parliament	CAG’s compliance, financial and performance audits; reports under Article 151	Ex post, independent, expert

• The three are complementary, not alternatives. Internal control prevents mistakes, audit detects them, and Parliament judges them and forces correction.
• Two further channels support them: judicial accountability (courts act on audit findings, as in the 2G and coal cases) and citizen accountability (social audit, RTI, public scrutiny of CAG reports through the media).

1.3 Constitutional foundations

The Constitution builds financial accountability into a set of articles that together say: no tax without law, no spending without appropriation, and an independent auditor to check both.

Article	Provision	Accountability role
265	No tax shall be levied or collected except by authority of law	Legislative control over raising money
266(1), 266(2)	Consolidated Fund of India; Public Account of India	Defines where public money sits
267	Contingency Fund of India	Emergency spending, recouped by later vote
112, 113, 114	Annual Financial Statement; Lok Sabha votes demands; no withdrawal from the Consolidated Fund except under an Appropriation Act	Legislative control over spending
115	Supplementary, additional and excess grants	Regularising overspending after PAC scrutiny
148–151	CAG: appointment, duties, form of accounts (150), audit reports laid before Parliament and State Legislatures (151)	Independent audit
279	CAG certifies the net proceeds of taxes (his certificate is final)	Fiscal federalism

• Article 265 is the financial form of the rule of law: the executive cannot tax by order. Courts strike down levies imposed by executive instruction, and a “tax” collected without legal backing must be refunded. It is the revenue twin of Article 114, which forbids spending without an Appropriation Act.
• Together the two embody the old principle “no taxation without representation” and its corollary “no expenditure without appropriation“.

1.4 The accountability chain

The chain runs from Parliament’s grant to Parliament’s review. Each link depends on the one before it; a weak link anywhere (late accounts, a delayed audit, a report never discussed) breaks the cycle.

1. Parliament votes demands for grants and passes the Appropriation Act and the Finance Act.
2. The Ministry of Finance (Department of Expenditure) releases funds, sets delegations and monitors spending.
3. Ministries and departments spend through Drawing and Disbursing Officers and Pay and Accounts Offices; the Secretary is the Chief Accounting Authority of the ministry.
4. The Controller General of Accounts (CGA) consolidates the Union’s accounts and prepares the Finance Accounts and Appropriation Accounts.
5. The CAG audits these accounts and the underlying transactions and reports under Article 151.
6. The President causes the reports to be laid before each House.
7. The Public Accounts Committee (and COPU for public undertakings) examines selected paragraphs, takes evidence and reports.
8. The government furnishes Action Taken Notes; the PAC presents Action Taken Reports; excess spending is regularised by an excess grant.

• Prevent, detect, correct. Steps 2–3 are preventive control, steps 4–5 detective control, steps 7–8 corrective control.
• Time lag. Because the accounts close only after 31 March and audit follows, the PAC often examines spending two or three years old. This “post-mortem” character is the chain’s main weakness (Section 6.7).

2. Internal Financial Control: the Executive’s Own Checks

2.1 The Ministry of Finance as controller

The Ministry of Finance, mainly through its Department of Expenditure, is the executive’s own guardian of the purse. The classic justification is that the taxpayer cannot be left to the spending departments: some authority not directly concerned with the spending must weigh each item against the others and against available resources.

• Control at the budget stage. It scrutinises every proposal with financial implications, cuts inflated estimates, rejects technically unsound schemes and fixes priorities across ministries. Its typical questions: is the expenditure proper, does the ministry have authority, is it necessary, are costs excessive, are there cheaper alternatives?
• Control during execution. After the budget is passed, its prior concurrence is needed for expenditure beyond delegated limits, for re-appropriation between heads in certain cases, for new services, and for appraisal of large projects (Expenditure Finance Committee, Public Investment Board procedures). It reviews expenditure periodically to judge whether supplementary grants or savings will arise.
• Miscellaneous control. Grants-in-aid rules, write-off of losses, waivers of recovery, contracts, and staff strength (through the Staff Inspection Unit).

Critique and balance.

• Critics, including Paul Appleby in his 1953 and 1956 reports on Indian administration, held that detailed Finance Ministry control produced delay, a “saving candle ends” mentality, an attitude of accepting precedent and refusing risk, and a culture in which departments inflated estimates because they expected cuts. The Finance Ministry was said to strain at the gnat (small establishment items) and swallow the camel (large programmes it could not judge technically).
• The answer adopted in India was delegation with accountability: more financial powers to administrative ministries (codified in the Delegation of Financial Powers Rules, 1978, as amended), exercised with an in-house financial adviser. This is the logic of the Integrated Financial Adviser.

2.2 Financial advisers and the Integrated Financial Adviser (1975)

• 1968: each ministry got an Internal Financial Adviser for matters within delegated powers, while matters beyond them went to an “associate” Financial Adviser sitting in the Department of Expenditure.
• 6 October 1975: the Department of Expenditure’s Office Memorandum introduced the scheme of Integrated Financial Adviser (IFA), merging the two roles in one officer placed inside the administrative ministry, alongside a large enhancement of the ministry’s delegated powers.
• Dual responsibility: the IFA is responsible both to the Secretary of the administrative ministry and to the Ministry of Finance. Within delegated powers he helps the ministry use its freedom well; outside them he works under the Finance Ministry’s general guidance.
• Functions:
  • association with scheme formulation from the initial stage, scrutiny of projects and programmes;
  • budget formulation and post-budget vigilance (no large shortfalls, no unforeseen excesses);
  • preparation of the ministry’s performance and outcome budget and monitoring of schemes against it;
  • oversight of the ministry’s accounting and internal audit organisation.

2.3 The accounting machinery inside a ministry

After the 1976 departmentalisation (Section 4.2), each civil ministry runs its own payment and accounting organisation. The table sets out who does what.

Officer	Role in financial accountability
Secretary of the ministry	Chief Accounting Authority: responsible for the ministry’s spending, its accounts and their certification; appears before the PAC as the principal witness
Integrated Financial Adviser	Advises the Secretary; heads the ministry’s finance, budget and accounting set-up on his behalf
Principal Chief / Chief Controller of Accounts	Heads the ministry’s accounting organisation: Pay and Accounts Offices, consolidation of the ministry’s accounts, preparation of its Appropriation Accounts, and the internal audit wing
Pay and Accounts Officer (PAO)	Pre-checks and makes payments; maintains primary accounts
Drawing and Disbursing Officer (DDO)	Draws money for an office and pays individual claims
Controlling Officer	Head of a department controlling a grant: distributes funds and watches progress of expenditure

• The arrangement puts payment, accounting and internal audit inside the executive, leaving the CAG as a purely external auditor.
• It also makes the Secretary personally answerable before the PAC, the Indian version of the British “accounting officer” principle.

2.4 Internal audit

• Meaning. Internal audit is an independent, objective review within the organisation of whether its controls, risk management and operations work as intended. It is management’s own audit: it reports to the head of the department, not to the legislature.
• In the Union government, internal audit is carried out by the Internal Audit Wings under each Chief Controller of Accounts, with norms set by the CGA. In most States it is weaker, often limited to pre-checking of bills in treasuries.
• Internal vs external audit compared:

Basis	Internal audit	External (statutory) audit
Agency	Within the executive (CCA’s internal audit wing)	Independent constitutional body (CAG)
Reports to	Secretary / management	Parliament through the President
Timing	Concurrent, continuous	Mostly ex post
Purpose	Improve controls, prevent loss, help managers	Hold the executive accountable to the legislature
Coverage	Whole of operations, risk-based	Test-check on a sample basis
Independence	Limited (part of management)	High (constitutional safeguards)

Why internal audit matters for performance.

• It is concurrent, so it can stop a loss before it happens; external audit usually reports after the money is gone.
• It reviews systems (procurement, inventory, IT controls, fund flow to implementing agencies), so it improves performance and service delivery, not just compliance.
• It reduces the external auditor’s burden: a strong internal control system allows the CAG to rely on it and concentrate on high-risk areas.
• It supports risk management: modern internal audit ranks activities by risk and audits the riskiest first.

Weaknesses and reform.

• In practice Indian internal audit has remained a routine regularity check, poorly staffed and not independent of the management it audits.
• A Task Force constituted by the CAG in July 2006 at the Finance Ministry’s request found internal audit severely restricted in mandate and ignored by management, and favoured a professionally trained Chief Internal Auditor.
• The 2nd Administrative Reforms Commission, 14th Report, Strengthening Financial Management Systems (April 2009), recommended a statutory Chief Internal Auditor in ministries, an Audit Committee in each ministry, a shift to risk-based internal audit, and stronger internal control in States (where it proposed that the IFA be responsible for both internal audit and accounting).

• Different principals, not a smaller CAG. Internal audit serves management (helping the Secretary run the ministry and catch problems early); CAG audit serves Parliament. A good internal audit sharpens external audit, but neither can replace the other.

3. Legislative Accountability: Parliament’s Financial Committees

3.1 The instruments of parliamentary financial control

Parliament’s financial control has an ex ante part (granting money) and an ex post part (reviewing its use). The budgetary stage is covered in the article on budgets and the budgetary process; it is summarised here only to show where the committees fit.

Stage	Instruments	What it achieves
Before spending (ex ante)	General discussion of the budget; scrutiny of demands for grants by Departmentally Related Standing Committees (from 1993); voting of demands, cut motions; Appropriation and Finance Bills	Authorisation and its limits
During the year	Questions, calling attention, debates; supplementary and additional grants; vote on account	Continuous scrutiny of policy and spending
After spending (ex post)	PAC on Appropriation and Finance Accounts and CAG reports; COPU on public undertakings; excess grants (Article 115)	Review, correction, regularisation
Estimates scrutiny	Estimates Committee examines selected estimates and suggests economies	Efficiency and economy of administration

• The three financial committees, the PAC, the Estimates Committee and COPU, are standing committees of the Lok Sabha; no Minister can be a member, and a member who becomes a Minister ceases to be a member.

3.2 The Public Accounts Committee (PAC)

Origin and composition.

• First set up in 1921 under the Montagu–Chelmsford Reforms (Government of India Act, 1919); the Finance Member was its chairman and the Finance Department its secretariat. After independence the Finance Minister continued as chairman until the Constitution came into force in 1950, when it became a full parliamentary committee under the Speaker with a non-official chairman.
• Constituted every year under Rule 308 of the Lok Sabha Rules: not more than 22 members, 15 elected by the Lok Sabha and 7 by the Rajya Sabha (associated since 1954–55), by proportional representation through the single transferable vote. Term: one year.
• Opposition chairmanship: till 1966–67 a senior ruling-party member chaired it; in 1967, for the first time, the Speaker appointed a member of the Opposition as chairman, a convention followed ever since. In August 2024 K.C. Venugopal of the Congress was named chairman for the 18th Lok Sabha.
• The PAC completed a hundred years in 2021.

Functions.

• Examines the Appropriation Accounts and the Finance Accounts of the Union and the CAG’s audit reports on them, on revenue receipts, and on autonomous bodies audited by the CAG.
• Satisfies itself that:
  • money shown as spent was legally available for the purpose to which it was applied;
  • the expenditure conforms to the authority governing it;
  • every re-appropriation was made under the rules.
• Examines cases of excess over voted grants and recommends their regularisation by an excess grant (a practice dating back to the PAC’s first report on accounts in 1921). It treats savings from bad estimation no more leniently than excesses.
• Goes beyond formal legality to the “wisdom, faithfulness and economy” of spending: losses, wasteful expenditure, weak systems.

Method of working.

• The CAG is its “friend, philosopher and guide”: he briefs the chairman, helps select the paragraphs to examine, sits through the evidence, and vets the draft report for facts. The PAC works almost entirely on the basis of CAG reports.
• Ministries give explanatory notes; the Secretaries appear as witnesses; proceedings are private and non-partisan by convention; the report is adopted by consensus.
• After the report, ministries furnish Action Taken Notes; the PAC presents Action Taken Reports sorting the government’s replies into accepted, not pursued, not accepted (reiterated) and interim.
• Sub-committees and study groups (from 1952–53) take up large subjects.

Significance.

• It is “the best medium through which the taxpayer sees what has been done with his money“, an old description that still captures its role.
• Opposition chairmanship and consensus working make it the most credible check on the executive’s money; its recommendations, though not legally binding, are by convention accepted in the great majority of cases and are treated almost as the House’s own view.
• It acts as a deterrent: the prospect of appearing before the PAC is one of the strongest pressures on a Secretary to keep proper records and avoid irregular spending.
• It has driven systemic reforms: it pressed for the separation of accounts from audit (achieved in 1976), for performance reviews, and for better accounting in large spending departments.

Limitations.

• Post-mortem: it examines accounts two or three years after the spending, when officers have moved and the loss cannot be undone.
• Cannot examine policy: it judges whether money was spent well within a policy, not whether the policy was right, though the line between the two is thin (a wasteful deal often reflects a flawed policy).
• Cannot disallow any expenditure; it can only draw attention.
• Dependent on the CAG: its scope is largely coextensive with audit reports; weak or delayed audit means weak PAC scrutiny.
• Selective coverage: it can examine only a small fraction of the paragraphs in each year’s reports; the rest are never discussed.
• One-year tenure prevents specialisation; reports are rarely debated in the House.
• State PACs carry large backlogs, and in some States do not meet regularly (in the Bihar fodder case, excess drawals reported by audit were not taken up in time).

3.3 The Estimates Committee

• Origin: traced to the Standing Finance Committee (1921), chaired by the Finance Member; the first post-independence Estimates Committee was constituted in April 1950.
• Composition: 30 members, all from the Lok Sabha (the Rajya Sabha has no place), elected every year; chairman appointed by the Speaker, usually from the ruling party.
• Functions (Lok Sabha Rules):
  • to report what economies, improvements in organisation, efficiency or administrative reform, consistent with the policy underlying the estimates, may be effected;
  • to suggest alternative policies to bring about efficiency and economy (added in 1953);
  • to examine whether the money is well laid out within the limits of the policy;
  • to suggest the form in which estimates are presented to Parliament.
• Working: selective: a few ministries and a few subjects each year; questionnaires, study tours, evidence of officials and non-officials; reports followed by Action Taken Reports. By the end of the 17th Lok Sabha it had presented 1,184 reports since 1950.
• Often called a “continuous economy committee” because it can examine estimates throughout the year and keeps returning to the economy and efficiency of administration. Its early report on the reorganisation of the Central Secretariat was in effect an organisation and methods study.

Limitations.

• It examines estimates after they are presented; demands are voted regardless of whether it has reported, so it has no role in framing or passing them.
• No CAG to guide it, so it starts from scratch; members are laymen with one-year terms.
• Its recommendations are advisory; critics have called its reports “a big list of advices” and accused it of straying into administrative reorganisation beyond its remit.
• Selective coverage means a ministry may be scrutinised once in several years.
• Defence: its lay character keeps it from being captured by experts; it is the only body that looks at organisation and economy forward-looking, and its reports educate both Parliament and public.

3.4 The Committee on Public Undertakings (COPU)

• Origin: a resolution moved by Lanka Sundaram in December 1953 argued that the PAC and Estimates Committee could not give public enterprises the attention they needed; the V.K. Krishna Menon Committee examined the idea; COPU came into existence on 1 May 1964, on the pattern of the British Select Committee on Nationalised Industries.
• Composition: 22 members, 15 from the Lok Sabha and 7 from the Rajya Sabha, one-year term.
• Functions: examines the reports and accounts of specified public undertakings and the CAG’s reports on them; examines whether their affairs are managed in accordance with sound business principles and prudent commercial practice, in the context of their autonomy and efficiency.
• Excluded: matters of major government policy, day-to-day administration, and matters for which special machinery exists under a statute.
• Working: individual enterprise reports, horizontal studies across a sector (personnel policy, financial management, foreign collaboration), and Action Taken Reports. The 1st ARC favoured horizontal studies over enterprise-by-enterprise scrutiny.
• Limitations: cannot cover all enterprises (some, including defence undertakings, kept outside); lower status of its recommendations than the PAC’s; little House discussion; one-year tenure; occasional charge of being either too harsh or of usurping other controllers’ roles.

3.5 The three committees compared

The table brings the three committees together. The key contrast is time: the PAC looks back, the Estimates Committee looks forward, and COPU does both for one sector.

Basis	PAC	Estimates Committee	COPU
Set up	1921 (parliamentary committee from 1950)	1950	1964
Members	22 (15 LS + 7 RS)	30 (LS only)	22 (15 LS + 7 RS)
Chair	Opposition member (since 1967)	Usually ruling party	Usually ruling party
Main material	Appropriation and Finance Accounts, CAG reports	Budget estimates of selected ministries	Reports, accounts and CAG audit of PSUs
Orientation	Ex post, legality and propriety	Forward-looking, economy and efficiency	Commercial efficiency and autonomy
CAG support	Yes, continuous	No	Yes, for audit reports
Typical description	Watchdog of public expenditure; post-mortem scrutiny of accounts	Continuous economy committee	Guardian of public enterprise accountability

3.6 Is parliamentary financial control declining?

• Arguments that it is:
  • most demands for grants are passed by the guillotine without discussion (see the article on the budgetary process);
  • committee reports are rarely debated; Action Taken Reports trail years behind;
  • the number of CAG reports on the Union tabled in Parliament has fallen: an analysis of tabled reports found only 18 in 2023, and an average of 22 a year in 2019–2023 against 40 in 2014–2018;
  • large spending flows through off-budget borrowings, special purpose vehicles, PPPs and transfers to local bodies and societies, partly outside the committees’ reach;
  • low attendance and one-year tenures limit specialisation.
• Arguments that it is evolving rather than declining:
  • Departmentally Related Standing Committees (1993) now examine every ministry’s demands;
  • the PAC continues to take up high-profile audits (2G, coal, Bharatmala);
  • digital systems (PFMS, online Action Taken Note monitoring) make tracking easier.
• Reforms commonly proposed: longer committee tenure (co-terminous with the Lok Sabha, one-third retiring each year), PAC examination of all audit reports within a time limit, research staff and expert advisers, mandatory House discussion of committee reports where the government disagrees, statutory deadlines for tabling CAG reports and for Action Taken Notes, and better training of members in financial management.

4. Accounts: Recording the Use of Public Money

4.1 Meaning and purposes of government accounts

• Accounts are “statements of facts relating to money or things having money value”: the systematic recording, classifying and summarising of financial transactions and the interpretation of the results.
• Purposes (following L.D. White, the American scholar of administration, in Introduction to the Study of Public Administration, 1926):
  • to establish the fidelity of those handling funds and to protect honest officials;
  • to give information for policy-making and management;
  • to keep spending within budget provisions and limits;
  • to reveal the financial condition of the organisation in all its branches;
  • to permit adjustments in the rate of spending during the year;
  • to aid audit.
• Government vs commercial accounting. A firm keeps accounts mainly to measure profit and net worth. Government keeps them mainly to show compliance with legislative appropriation and the fiscal result (surplus or deficit) of its operations. This is why Indian government accounts have been cash-based and appropriation-oriented rather than accrual-based.

4.2 Separation of accounts from audit (1976)

The old position. From 1860 the Auditor General handled both accounts and audit; the Government of India Act, 1935 and the Audit and Accounts Order of 1936 kept the combination, and after 1950 the CAG compiled the accounts of the Union and the States as well as auditing them. Railway and Defence accounts were already maintained departmentally.

The criticism.

• An auditor who compiles the accounts he audits is in an embarrassing position; independence demands that the one who keeps the books should not certify them.
• Accounting is an executive function; audit is a quasi-parliamentary function. Mixing them blurs accountability.
• An agency outside the ministry kept its accounts, so ministries lacked timely data for management, project monitoring and performance budgeting.
• The PAC repeatedly pressed for separation. (The 1st Administrative Reforms Commission, interestingly, had seen no inherent conflict in the combination.)

The reform.

• The Cabinet approved departmentalised accounting in June 1975; the Finance Minister’s budget speech for 1976–77 argued that accounts and finance must be an integral part of management.
• Implemented through Ordinances, later replaced by the CAG’s (Duties, Powers and Conditions of Service) Amendment Act, 1976 and the Departmentalisation of Union Accounts (Transfer of Personnel) Act, 1976 (assented to on 8 April 1976, deemed in force from 1 March 1976). Under the proviso to Section 10 of the 1971 Act, the President relieved the CAG of compiling Union accounts.
• Departmentalised accounting began in a few departments on 1 June 1976 and in all other ministries from 1 October 1976.
• A new office of the Controller General of Accounts was created within the Department of Expenditure as the Union’s principal accounting authority, with the Indian Civil Accounts Service carved out of the Indian Audit and Accounts Service. 1 March is observed as Civil Accounts Day.
• States: the reform applied to the Union. The CAG’s offices (Accountants General, Accounts and Entitlement) still compile the accounts of all States except Goa; since 1984 the State accounting and audit offices have been separate wings within the CAG’s department, so that the office that compiles accounts does not audit them.

Arguments for the separation.

• Independence of audit: the CAG no longer audits his own work.
• Better financial management: each ministry gets timely, relevant accounts for monitoring, budgeting and decision-making.
• Responsibility: spending departments become responsible for payment and accounting together, which makes them careful not to exceed appropriations.
• Efficiency of audit: the CAG’s department can concentrate on audit.

Problems noticed. Staff and costs increased; States were slow to follow; and with payment, accounting and internal audit all inside the ministry, internal checks depend on the ministry’s own integrity more than before.

4.3 The Controller General of Accounts (CGA)

The CGA, in the Department of Expenditure, is the principal accounts adviser to the Government of India and the head of the Union’s accounting system. His functions:

• Rules and form: frames accounting rules and manuals (the Civil Accounts Manual, Receipts and Payments Rules) and administers the List of Major and Minor Heads; the form of accounts itself is prescribed by the President on the advice of the CAG (Article 150).
• Payments and receipts: budget control, payments and receipt accounting for civil ministries through Pay and Accounts Offices.
• Consolidation and reporting: consolidates monthly accounts of the Union and publishes fiscal data (monthly receipts, expenditure and deficit) giving the Finance Minister and the public an early picture of the year; prepares the Union Government Finance Accounts and the Appropriation Accounts (Civil) for audit by the CAG and laying before Parliament; publishes “Accounts at a Glance”.
• Internal audit of civil ministries and technical advice on accounting matters, binding on ministries.
• Pensions of civil Central government employees (through the Central Pension Accounting Office).
• PFMS: owns and runs the Public Financial Management System.
• Cadre management of the Indian Civil Accounts Service.
• Significance for public financial management: the CGA is the bridge between budget and actuals; timely, accurate accounts are what make fiscal rules, cash management and performance monitoring possible.

4.4 The structure of government accounts: three parts

Since 1950 the accounts of the Union (and of each State) are kept in three parts, mirroring the Constitution.

Part	Article	What goes in	Legislative control
Consolidated Fund of India	266(1)	All revenues, loans raised (market borrowings, treasury bills, external loans), repayments of loans given by the government; all expenditure	No withdrawal without an Appropriation Act (Article 114); charged items not voted
Contingency Fund of India	267	An imprest for urgent, unforeseen expenditure, held by a Finance Secretary on behalf of the President; corpus ₹30,000 crore since the Finance Act, 2021 (it had been ₹500 crore)	Advances recouped after Parliament authorises the expenditure
Public Account of India	266(2)	Money the government holds as a banker or trustee: provident funds, small savings, deposits, reserve funds, remittances	No appropriation needed (it does not belong to the government), but transactions are audited

• Charged expenditure (salary of the President, judges, the CAG; debt charges; decrees of courts) is shown in the budget but not voted; it is still audited and examined by the PAC.
• States have the same three parts under Articles 266 and 267.

4.5 Classification of transactions

• India has a uniform classification of transactions for the Union and the States down to the minor-head level, prescribed in the List of Major and Minor Heads of Account (LMMH). Uniformity lets the accounts of the Union and all States be compared and consolidated.
• A revised structure from 1974 linked the classification to functions, programmes and schemes to suit performance budgeting.
• The six tiers of classification:
  • Major Head (four digits): a function of government, such as medical and public health;
  • Sub-Major Head (two digits): a sub-function;
  • Minor Head (three digits): a programme;
  • Sub-Head: a scheme;
  • Detailed Head: a sub-scheme or activity;
  • Object Head: the object of spending (salaries, office expenses, grants, capital works), which gives item-wise control.
• The first digit of a major head tells the type of transaction: 0 and 1 receipts; 2 and 3 revenue expenditure; 4 and 5 capital expenditure; 6 and 7 loans and advances; 8 Contingency Fund and Public Account.
• Illustratively, a hospital’s medicines would be booked under major head 2210 (Medical and Public Health, revenue), while building the hospital would go under 4210 (capital outlay on the same function).
• Changes in major and minor heads need the CAG’s advice under Article 150, which keeps the structure stable across governments.
• After the merger of the Plan and Non-Plan distinction (from 2017–18), schemes are classified as Central Sector and Centrally Sponsored, with a revenue and capital split (detailed in the budgets article).

4.6 Cash vs accrual accounting

Meaning.

• Cash accounting records a transaction when cash is received or paid. It is simple, objective and directly tied to appropriation: Parliament grants cash, and the accounts show cash spent.
• Accrual accounting records a transaction when the economic event occurs, when value is created, transferred or consumed, whether or not cash moves. It records assets and liabilities, charges depreciation on long-lived assets, and recognises receivables and payables.
• Example (illustrative): a ministry receives medical equipment worth ₹10 crore in March but pays in May. Cash accounting shows nothing this year and ₹10 crore next year. Accrual accounting records an asset and a liability this year, and spreads the equipment’s cost over its useful life through depreciation.

The two systems compared:

Basis	Cash accounting	Accrual accounting
When recorded	When cash moves	When economic value is created or consumed
Shows	Receipts, payments, deficit	Plus assets, liabilities, net worth, full cost of services
Liabilities	Hidden (pensions, guarantees, unpaid bills)	Disclosed
Assets	Not tracked after purchase	Tracked, depreciated
Link to appropriation	Direct	Needs reconciliation
Risk of manipulation	Deferring bills, advancing receipts to dress the deficit	Judgement in estimates and valuations
Cost and skill	Low	High (standards, asset registers, trained staff)

Why accrual is advocated.

• Full picture of liabilities: unfunded pensions, guarantees to public enterprises, arrears and deferred payments do not appear in cash accounts.
• Full cost of services, needed to link inputs to outputs and outcomes and to compare delivery options.
• Asset stewardship: assets created with public money are tracked.
• Curbs fiscal opportunism: cash accounts can be flattered by deferring payments or taking one-time receipts; accrual makes such moves visible.

Difficulties. Valuing public assets (roads, heritage); deciding when a disputed tax demand is revenue; estimating pension liabilities; cost of systems and training; the risk that judgement-based estimates can themselves be used to hide and distort. Many experts therefore favour cash and accrual running in parallel, with supplementary statements, rather than a wholesale switch.

The Indian roadmap.

• 12 August 2002: the CAG constituted the Government Accounting Standards Advisory Board (GASAB) under Article 150 to formulate standards for the Union and States.
• Twelfth Finance Commission (2004) recommended accrual accounting for the Union and States; the Union accepted it in principle and asked GASAB to draw up a roadmap and operational framework; the Thirteenth Finance Commission noted the work in progress.
• 2nd ARC, 14th Report (2009): move to accrual through a task force and pilots before wider adoption.
• Standards: Indian Government Accounting Standards (IGAS), for the cash system, become mandatory once notified by the government; four have been notified (IGAS 1 on disclosure of guarantees, IGAS 2 on grants-in-aid, IGAS 3 on loans and advances, IGAS 4 on prior-period adjustments). Indian Government Financial Reporting Standards (IGFRS), for the accrual system, remain recommendatory for pilot studies.
• Present position: Union and State accounts remain cash-based, with growing disclosure statements (guarantees, liabilities, extra-budgetary resources) that move them towards a modified cash system.

4.7 Finance Accounts and Appropriation Accounts

The two annual accounts are the raw material of parliamentary financial control. One shows the financial position, the other shows obedience to the vote.

Basis	Finance Accounts	Appropriation Accounts
Shows	Annual receipts and disbursements under each head, the Consolidated Fund, Contingency Fund and Public Account balances, debt and guarantees	Grant-wise comparison of the amount voted or charged with the actual expenditure, and explanations for excesses and savings
Purpose	Overall fiscal position	Compliance with the Appropriation Act
Union	Prepared by the CGA (civil); Railways and Defence prepare their own appropriation accounts	Prepared by ministries and CGA
States	Prepared by the CAG’s Accountants General	Prepared by the Accountants General
Audit	Audited and certified by the CAG	Audited by the CAG; report examined by the PAC

• Excess over grant found in the Appropriation Accounts must be regularised by Parliament through an excess grant under Article 115, but only after the PAC has examined it and recommended regularisation.

4.8 PFMS and the digital treasury

• Public Financial Management System (PFMS): a web-based application of the CGA. It began in 2009 as the Central Plan Scheme Monitoring System to track funds released under central schemes down to the implementing agency and report expenditure in real time; its scope was enlarged to direct payments to beneficiaries (the backbone of Direct Benefit Transfer) and later to all payments, receipts and the compilation of accounts of the Union.
• Treasury computerisation in the States (Integrated Financial Management Systems) brought online budget control, e-payments, and same-day accounting, and integrates with PFMS.
• Single Nodal Agency (SNA) model (2021) and SNA-SPARSH (Department of Expenditure OM of 13 July 2023): Centrally Sponsored Scheme funds are released “just in time” through the RBI’s e-Kuber platform, the Centre’s share moving only when the implementing agency actually incurs expenditure, ending the parking of unspent balances in agency bank accounts.

5. Audit: Meaning, Purposes and Types

5.1 Meaning and purposes

• Audit is an independent examination of accounts and transactions to discover and report to the legislature unauthorised, illegal or irregular expenditure and unsound financial practices, and increasingly to judge performance.
• James C. Charlesworth’s often-quoted formulation treats audit as the process of ascertaining whether the administration has spent, or is spending, its funds in accordance with the terms of the legislative instrument that appropriated the money. This is the appropriation view of audit: audit as the legislature’s instrument for enforcing its own grant.
• Purposes:
  • legislative control over the executive in the financial field;
  • detection and deterrence of fraud, waste and misuse;
  • assurance that accounts are accurate and complete;
  • improvement of systems and procedures;
  • information for Parliament and the public.
• S.L. Goel, the Indian scholar of financial administration, adds three roles: preventive audit (finding procedural errors before they recur), curative audit (detecting embezzlement and leading to disciplinary action) and promotive audit (helping administrative improvement through new procedures).
• Ashok Chanda, CAG from 1954 to 1960, argued that in mature democracies audit is not tolerated as a necessary evil but welcomed as a valued ally of administration, the two playing complementary roles in toning up government.

By timing:

• Pre-audit: before payment (the old treasury check; still done by Pay and Accounts Offices).
• Concurrent audit: during the transaction (internal audit, some audits of large projects).
• Post-audit: after payment; the CAG’s audit is essentially post-audit.

5.2 Types of audit by focus

The types below developed in layers, from narrow legality to broad performance. They are not alternatives: a single CAG report often combines several.

Type	Question asked	Example
Regularity / compliance audit	Was the expenditure legal, within the grant, properly sanctioned, supported by vouchers? Includes audit against provision of funds and audit of sanctions	Spending without a sanction; drawal in excess of grant
Propriety audit	Was it wise, faithful and economical, as a prudent person would spend his own money?	Buying costly equipment that lies unused
Financial (attest) audit	Do the financial statements present a true and fair view?	Certification of Finance and Appropriation Accounts; audit of accounts of government companies
Performance audit	Did the programme achieve economy, efficiency and effectiveness?	Bharatmala, Ayushman Bharat, Namami Gange audits
Revenue (receipt) audit	Were taxes correctly assessed and collected?	Under-assessment of income tax or GST
Commercial audit	Are public undertakings run efficiently? Supplementary audit of government companies	Audit of PSU accounts after the statutory auditor
IT audit	Are computerised systems secure, reliable, with proper controls?	Audit of PFMS, GSTN, beneficiary databases
Environmental audit	Did programmes comply with and achieve environmental goals?	River cleaning, pollution control, mining compliance
Social audit	Did benefits reach people as recorded? Conducted by the community	MGNREGA Gram Sabha audits

Propriety audit in detail.

• The canons of financial propriety in the General Financial Rules require, among other things, that every officer exercise the same vigilance as a person of ordinary prudence would over his own money; that expenditure be no more than the occasion demands; that no authority sanction expenditure that benefits itself; and that public money not be used for a particular person or section unless the law allows.
• Regularity audit is obligatory for the CAG; propriety audit is discretionary in the sense that it involves judgement and is applied selectively. It is the propriety audit that most clearly distinguishes the CAG from a professional auditor, who certifies accounts but does not judge the wisdom of decisions.

5.3 Performance audit: value for money and the 3Es

Meaning. Performance audit is an independent, objective and systematic examination of whether government programmes, organisations or activities are operating in accordance with the principles of economy, efficiency and effectiveness, and whether there is room for improvement. It is also called value-for-money (VFM) audit or 3E audit; in India it was earlier called efficiency-cum-performance audit.

• Economy (spending less): minimising the cost of inputs of the right quality. Were materials bought at the lowest reasonable price?
• Efficiency (spending well): the relationship between inputs and outputs. How much did each health centre cost to build and run, compared with norms?
• Effectiveness (spending wisely): the relationship between intended and actual results, the outcomes. Did institutional deliveries rise and maternal deaths fall?
• Many audit offices now add equity (did benefits reach the intended, especially the disadvantaged, groups?) and environment (was the programme sustainable?), the “4th and 5th E“.

Worked example (illustrative). A State sanctions ₹200 crore to build 100 primary health centres in tribal blocks.

• Economy: auditors compare the price paid for cement and equipment with market and schedule rates; a 15 per cent premium paid to a single supplier is an economy failure.
• Efficiency: they compare cost per centre and time taken with norms; centres finished but without doctors or electricity are inputs that produced no usable output.
• Effectiveness: they compare outcomes (institutional deliveries, immunisation) before and after; if outcomes did not improve because centres were sited far from habitations, the programme was ineffective even if built cheaply.
• Equity: they check whether the most remote blocks got their share.

Distinctive features of performance audit.

• It is selective (topics chosen by risk and significance), analytical (uses data, surveys, field visits, beneficiary interviews), criteria-based (judges against objectives, norms, benchmarks or good practice), and forward-looking (makes recommendations for improvement).
• It does not question policy objectives themselves, but examines whether the means chosen achieve them; in practice the line is contested.
• The CAG issued Performance Auditing Guidelines (2014) aligned to international standards.

Performance indicators and non-financial measures. Performance measurement uses a family of indicators, many of them non-financial:

• input (staff, money), output (roads built, patients treated), outcome (travel time saved, mortality reduced);
• efficiency ratios (cost per unit of output), quality (accuracy, waiting time, error rates);
• equity (coverage of target groups), timeliness (delivery within charter standards);
• citizen satisfaction (surveys, grievance data), sustainability (asset maintenance, environmental impact);
• process and capacity indicators (staff training, digital adoption).
• Relying only on fund utilisation (“money spent = success”) misses whether anything changed for citizens; the outcome budget’s Output-Outcome Monitoring Framework and the scheme dashboards attempt to supply such measures.

Performance audit and performance budgeting.

• The claim that there can be no performance auditing without performance budgeting rests on a sound point: performance audit needs stated objectives, targets and indicators as its criteria, and a performance or outcome budget supplies exactly these. Where the budget states only lump-sum inputs, the auditor has nothing objective to measure results against. Indeed, one stated aim of introducing performance budgeting in India was to make performance audit more effective and to bring accounting into line with a programme classification (hence the revised accounts structure of 1974).
• But the relationship is not absolute. Auditors can derive criteria from scheme guidelines, statutes, sanctioned norms, sectoral benchmarks and international good practice; the CAG was reporting performance reviews of schemes and enterprises for decades before outcome budgets arrived (2005). Performance audit can even push a government towards clearer objectives.
• The real interdependence: budgeting sets the promises (outlay–output–outcome), accounting records the inputs, and performance audit verifies the delivery. Each is weaker without the others.

How performance audit differs from evaluation. Evaluation (by NITI Aayog’s Development Monitoring and Evaluation Office or by ministries) is commissioned by the executive to learn and redesign; performance audit is done independently, for the legislature, and carries accountability consequences.

5.4 IT audit and environmental audit

• IT audit checks the general and application controls of computerised systems: data integrity, access control, validation checks, business continuity. As payments, tax and welfare move online, IT audit becomes central. The CAG’s audit of Ayushman Bharat–PM-JAY (Report No. 11 of 2023) found weak validation in the beneficiary database: in one instance 7,49,820 beneficiaries were registered against a single dummy mobile number made up of ten nines, and in some States claims were paid in death cases without the required death summaries and mortality audits. Such findings come from data analytics, not from vouchers.
• Environmental audit examines environmental programmes and the environmental compliance of other programmes (pollution control, waste management, mining, forests), applying the 3Es plus sustainability. The CAG’s performance audit of the Namami Gange river rejuvenation programme (2017) is an example.

5.5 Social audit: the bridge

• Social audit is an audit by the people, especially the intended beneficiaries: official records are verified against ground reality and findings are read out in a public forum (the Gram Sabha), where officials must respond.
• Legal basis in MGNREGA: Section 17 requires the Gram Sabha to conduct regular social audits of all works; the MGNREGA Audit of Schemes Rules, 2011 were framed by the Centre in consultation with the CAG; a joint Ministry of Rural Development–CAG task force (2015) led to the Auditing Standards for Social Audit, notified in December 2016.
• Statutory and social audit compared:

Basis	Statutory (CAG) audit	Social audit
Who audits	Professional, independent auditor	Community, beneficiaries, with a social audit unit
Reports to	Legislature	Gram Sabha, then administration
Focus	Legality, propriety, performance	Whether benefits reached people; local truth
Method	Records, sampling, analysis	Door-to-door verification, public hearing
Strength	Independence, expertise, legal backing	Local knowledge, immediacy, empowerment
Weakness	Distant, late, sample-based	No punitive power, capture by local elites, uneven quality

• The two are complementary rather than identical: social audit supplies ground evidence and timeliness that a distant auditor lacks; statutory audit supplies independence, expertise and enforcement through Parliament. The CAG’s role in framing social audit standards shows the bridge. The full treatment is in the article on Citizen’s Charters, RTI and social audit.

6. The Comptroller and Auditor General of India

6.1 Evolution

• 1858–1860: after the Crown took over from the East India Company, an Accountant General to the Government of India was appointed and, in 1860, the first Auditor General, with both accounts and audit functions.
• Government of India Act, 1919: the Auditor General in India received statutory recognition, appointed by the Secretary of State in Council; the PAC began in 1921.
• Government of India Act, 1935: the Auditor General of India, appointed by the Crown, removable only like a Federal Court judge; the Constitution’s provisions are modelled on this.
• Constitution (1950): Articles 148–151; the first CAG was V. Narahari Rao (1948–54).
• CAG’s (Duties, Powers and Conditions of Service) Act, 1971, amended in 1976 to separate accounts from audit.

6.2 Constitutional provisions

Article	Content
148(1)	Appointed by the President by warrant under his hand and seal; removable only in like manner and on like grounds as a Supreme Court judge (proved misbehaviour or incapacity, by an address of both Houses passed by a special majority)
148(2)	Oath before the President (Third Schedule): to uphold the Constitution and the laws
148(3)	Salary and conditions fixed by Parliament by law; not to be varied to his disadvantage after appointment
148(4)	Not eligible for further office under the Union or any State after ceasing to hold office
148(5)	Conditions of service of the Indian Audit and Accounts Department and his administrative powers prescribed by the President after consultation with the CAG
148(6)	Administrative expenses of his office, including salaries and pensions, charged on the Consolidated Fund
149	Duties and powers as prescribed by parliamentary law (now the 1971 Act) in relation to the accounts of the Union, the States and any other authority or body
150	Accounts of the Union and States kept in the form the President prescribes on the CAG’s advice
151	Audit reports on Union accounts to the President, who lays them before Parliament; on State accounts to the Governor, who lays them before the State Legislature
279	Certifies the net proceeds of taxes; his certificate is final

• Unitary audit in a federal set-up: a single CAG audits the Union and all States, unlike federations such as the United States or Australia where States have their own auditors. Accountants General in the States are part of his department.

6.3 The 1971 Act: duties and powers

• Section 4: term of six years or until the age of 65, whichever is earlier.
• Section 10: compilation of accounts; the proviso allowed the President (and Governors) to relieve him of this, used for the Union in 1976.
• Section 13: audit of all expenditure from the Consolidated Funds of the Union, States and Union Territories with legislatures (whether money was legally available and spent in conformity with authority); transactions of Contingency Funds and Public Accounts; trading and manufacturing accounts of departments.
• Section 14: bodies substantially financed by government: grants or loans of at least ₹25 lakh a year amounting to at least 75 per cent of the body’s expenditure; or, with the President’s or Governor’s approval, any body receiving at least ₹1 crore. Audit continues for two further years once begun.
• Section 15: audit of grants and loans to examine whether the conditions of the grant are met.
• Section 16: audit of receipts into the Consolidated Funds (taxes, non-tax revenue).
• Section 17: audit of stores and stock.
• Section 18: powers to inspect offices, call for records and put questions.
• Section 19: audit of government companies (now under the Companies Act, 2013: the CAG appoints their statutory auditors and may conduct a supplementary audit) and of statutory corporations under their own laws.
• Section 20: audit of other bodies on request or entrustment in the public interest.
• Section 7A of the FRBM Act (inserted in 2012) lets the government entrust the CAG with periodic reviews of compliance with fiscal rules; the first such report covered 2014–15.

The 2014 telecom judgment. In Association of Unified Telecom Service Providers of India v. Union of India (Supreme Court, 17 April 2014), private telecom companies argued that the CAG could not audit them. The Court held that the licence fee and spectrum charges paid under revenue-sharing arrangements are receipts of the Consolidated Fund (Article 266, Section 16), so the CAG can examine the underlying records of private operators to verify that the government’s share was correctly computed. The judgment extended the CAG’s reach into private entities that share public revenue, a principle relevant to PPPs and natural-resource contracts.

6.4 Independence

• Security of tenure: removal only like a Supreme Court judge; does not hold office at the President’s pleasure.
• Financial security: salary equal to a Supreme Court judge; conditions not variable to his disadvantage; office expenses charged.
• No post-retirement office under any government, removing the temptation to please.
• Control over his department: service rules made only after consulting him.
• No minister represents him in Parliament; he is answerable to Parliament through his reports, not to the government.
• B.R. Ambedkar told the Constituent Assembly in 1949 that the CAG was “probably the most important officer” under the Constitution, because he was to see that not a farthing was spent without the authority of the legislature; he ranked the office with the judiciary, the Election Commission and the UPSC among the bulwarks of democratic government.
• Dual role: the CAG acts for Parliament (checking that the executive obeys the law and the grant) and, within the executive, for the government (checking that subordinate authorities follow its rules). He is neither part of the legislature nor of the executive.

Gaps in independence.

• Appointment by the executive with no prescribed qualifications or selection procedure. In 2013 a group of former officials challenged the appointment of Shashi Kant Sharma, a former Defence Secretary, on grounds of conflict of interest and lack of a transparent procedure; the Supreme Court sent them to the High Court, and the Delhi High Court (August 2014) upheld the appointment, leaving the method to the executive.
• Background: since the 1980s CAGs have usually come from the IAS rather than the Indian Audit and Accounts Service; critics argue this departs from the Constituent Assembly’s expectation of financial expertise and puts former administrators in charge of auditing their former colleagues. The current CAG, K. Sanjay Murthy (IAS, 1989, Himachal Pradesh cadre), was sworn in on 21 November 2024.
• Dependence on the executive for tabling (the government decides when reports are laid), for replies to audit queries, and for the department’s budget growth.

6.5 What the CAG produces

• Compliance audit reports (regularity and propriety) on Union civil ministries, Defence, Railways, revenue receipts, and on each State.
• Performance audit reports on schemes and programmes.
• Financial audit: certification of the Finance Accounts and Appropriation Accounts; audit of government companies and corporations.
• State Finances Audit Reports analysing each State’s fiscal position, debt, off-budget borrowings and budget management; in September 2025 the CAG released its first decadal compendium on State finances, showing the combined public debt of the 28 States rising from ₹17.57 lakh crore (2013–14) to ₹59.60 lakh crore (2022–23), about 23 per cent of their GSDP.
• FRBM compliance reviews for the Union.
• Technical guidance and support to local fund auditors for Panchayats and Municipalities (recommended by the Eleventh Finance Commission); the CAG audits local bodies only where State law or entrustment allows.
• International audits: the CAG has served as external auditor of several United Nations bodies.

6.6 Major reports and their impact

The reports below show the range of the CAG’s work: from presumptive-loss estimates that shook governments to performance audits of flagship schemes. Their impact depended on what Parliament, courts and investigators did next.

Report	Year	Core finding	What followed
2G spectrum (Report No. 19 of 2010)	Tabled 16 Nov 2010	122 licences issued in January 2008 at 2001 prices; presumptive loss up to ₹1.76 lakh crore	PAC and JPC inquiries; CBI case; Supreme Court cancelled the 122 licences (Centre for PIL v. Union of India, February 2012); trial court acquitted the accused in December 2017, showing the gap between audit loss and criminal proof
Coal block allocation	Tabled 17 Aug 2012	Allocation without competitive bidding gave private allottees a financial gain of about ₹1.86 lakh crore	Supreme Court declared allocations since 1993 illegal and cancelled 214 blocks (Manohar Lal Sharma, 2014); auction regime under the Coal Mines (Special Provisions) Act, 2015
Rafale / capital acquisition in IAF (Report No. 3 of 2019)	Tabled 13 Feb 2019	The 2016 deal for 36 aircraft was 2.86 per cent cheaper than the audit’s aligned price of the 2007 bid; delivery only one month faster; prices redacted at the Defence Ministry’s insistence	Political debate; showed both the reach of audit into defence deals and the limits set by confidentiality
Bharatmala Pariyojana Phase I (Report No. 19 of 2023)	Tabled 10 Aug 2023	Cost escalation, weak project preparation; Dwarka Expressway at ₹250.77 crore/km against ₹18.20 crore/km approved	Examined by the PAC; ministry defended design choices
Ayushman Bharat–PM-JAY (Report No. 11 of 2023)	Tabled 8 Aug 2023	Database errors, invalid mobile numbers, claims for dead patients, excess payments	Changes in the beneficiary system (BIS 2.0)
Delhi Excise Policy 2021–22 (State report)	Tabled 25 Feb 2025	Revenue loss of about ₹2,002 crore; expert advice ignored; exemptions without Cabinet approval	Referred to the Delhi Assembly’s PAC

• Lesson of the “presumptive loss” debate. The 2G and coal figures were estimates of revenue foregone, not cash stolen; critics called them speculative and argued that the CAG had questioned policy choices (first-come-first-served, nomination allocation). Defenders replied that the CAG’s job is to quantify the cost of a decision so that Parliament can judge it. The courts, by cancelling the allocations, upheld the substance of the audit criticism even where the exact numbers were contested.

6.7 Limits of the CAG and of audit

• Ex post audit. The CAG mainly performs post-audit: the money is spent, often years earlier, before he reports, a “dissection after rigor mortis”. Unlike some audit institutions abroad, he has no pre-audit or concurrent power over the release of money.
• Delay. Accounts close after the year; audit follows; reports are tabled a year or more later; the PAC takes them up later still. Officers move, records fade, recovery becomes impossible.
• Slow and evasive replies. Ministries are not legally bound to reply to audit queries within a time limit; in 2010 the CAG sought an amendment requiring replies within 30 days.
• Tabling depends on the government. Reports on the Union are laid by the President and on States by the Governor, in practice when the government chooses; there have been long delays in tabling inconvenient reports at State level.
• PAC backlog. Only a small fraction of audit paragraphs are ever discussed; State PACs fall even further behind.
• No enforcement or surcharge power. The CAG can only report. He cannot recover losses, surcharge a negligent official, or initiate disciplinary or criminal action. Audit institutions such as Japan’s Board of Audit (which can demand indemnity and disciplinary action) and the French Cour des comptes (which can fine public managers) show the alternatives. Hence the famous description of the Indian CAG as a prosecutor with a law that hobbles it, a judge without the power to sentence and a litigant with no right of appeal.
• Coverage gaps:
  • PPPs and private concessionaires: the 1971 Act did not anticipate them; access depends on contract terms and on cases like the 2014 telecom judgment.
  • Panchayats and municipalities: funds routed to local bodies, societies and NGOs under schemes such as MGNREGA, SSA and NRHM were partly beyond regular audit; by some estimates in 2010, more than ₹80,000 crore a year flowed through such channels.
  • Autonomous bodies below the Section 14 thresholds; secret service expenditure (the CAG accepts a certificate from the competent authority).
  • Government companies: the primary audit is by chartered accountants; the CAG’s is supplementary.
• Fewer reports. The decline in the number of Union audit reports tabled (only 18 in 2023) has been read by critics as reduced audit output or reluctance to report.
• The “overreach” and “paralysis” charges.
  • Audits of policy-linked decisions (spectrum, coal, airports) led governments to accuse the CAG of second-guessing policy with hindsight and of becoming a political weapon.
  • Officials argue that fear of audit, alongside vigilance agencies, investigators and courts, produces risk-aversion and decision paralysis: files are pushed upward, decisions delayed, innovation avoided. This revives Appleby’s 1953 critique that Indian audit bred timidity and treated auditing expertise as if it were administrative judgement.
  • The classic standard for the auditor’s attitude is the English judge Lord Justice Lopes’s remark in the Kingston Cotton Mill case (1896) that an auditor is “a watchdog, but not a bloodhound”: he must be vigilant and sceptical, but need not presume dishonesty in every transaction.

6.8 Reforms and the changing role of the CAG

Reforms proposed or under way:

• Selection and qualifications: a transparent, broad-based selection committee and prescribed qualifications, as petitioners sought in 2013; some propose a multi-member audit board on the lines of the Election Commission, as exists in Japan, Germany and Korea.
• Amending the 1971 Act (the CAG’s 2010 proposals, pressed under Vinod Rai, CAG from 2008 to 2013): time-bound replies to audit queries; time-bound tabling of reports; and an explicit mandate to audit PPPs, joint ventures and funds routed through PRIs and NGOs.
• Enforcement powers: powers to summon officials, fix responsibility and recover losses, with an appeal mechanism, on the lines of other audit institutions.
• Real-time and concurrent audit: using PFMS and other databases for continuous, data-driven audit so that findings come while correction is still possible.
• Local bodies: strengthening local fund audit with the CAG’s technical guidance; the Fifteenth Finance Commission made the online availability of audited accounts a condition for local-body grants.
• Quality and standards: the CAG’s Audit Quality Management Framework (issued in 2009 and revised in 2014) sets policies for leadership, ethics, human resources, audit performance, stakeholder relations and continuous improvement, in line with INTOSAI and ASOSAI standards; the Performance Auditing Guidelines (2014); a Strategic Plan of SAI India 2023–2030; and a 2014 protocol for direct access to private-sector records.
• Balanced reporting: the 2nd ARC asked for timely and balanced CAG reports and systematic tracking of pending audit paragraphs; within government, a monitoring system tracks Action Taken Notes on audit paragraphs.

Outward role. In September 2024 the CAG of India assumed the chair of ASOSAI (the Asian Organisation of Supreme Audit Institutions, founded in New Delhi) for 2024–2027 at its 16th Assembly in New Delhi, promising a focus on technology-driven audits and the audit of local bodies.

7. Comparative Models of Public Audit

7.1 The three models

• Westminster (parliamentary, monocratic) model: a single Auditor General, closely tied to Parliament and its Public Accounts Committee, reporting findings without judicial powers. India, the UK, Canada, Australia and most Commonwealth countries.
• Judicial (court) model: a court of audit whose members are magistrates with judicial independence; it audits and can judge and sanction public accountants and managers. France, Italy, Spain, Portugal, much of francophone Africa and Latin Europe.
• Board (collegiate) model: a board or college of members decides together, without full judicial powers. Japan’s Board of Audit (a constitutional body headed by a three-member Audit Commission), Germany’s Federal Court of Audit (a collegiate body whose members enjoy judicial independence but which does not judge cases), Indonesia’s BPK.

7.2 Four institutions compared

Basis	UK: NAO / C&AG	US: GAO	France: Cour des comptes	India: CAG
Model	Westminster	Legislative agency	Judicial	Westminster
Head	Comptroller and Auditor General, an officer of the House of Commons	Comptroller General	First President, with magistrate members	Comptroller and Auditor General, a constitutional authority
Appointment	By the Crown on an address of the Commons moved by the PM with the agreement of the PAC chair	By the President from a list proposed by a bipartisan congressional commission, with Senate confirmation	By decree; members are irremovable magistrates	By the President (in effect the Union government)
Term	10 years, non-renewable (Budget Responsibility and National Audit Act, 2011)	15 years	Life career as magistrates	6 years or age 65
Powers	Audit, VFM reports; comptroller function over issues from the Consolidated Fund	Audits, investigations, legal opinions for Congress	Audit and jurisdictional powers; since 1 January 2023 a unified regime makes public managers liable to fines for serious financial faults, with a new financial court of appeal (2023)	Audit and reporting only
Relationship with legislature	Works hand in hand with the PAC; budget set by a parliamentary commission	Serves Congress; renamed Government Accountability Office in 2004	Assists both Parliament and government (Article 47-2 of the Constitution)	Reports through the President; PAC relies on it

• UK history: the Exchequer and Audit Departments Act, 1866 created the Comptroller and Auditor General and the annual appropriation accounts, completing the cycle of grant, account, audit and PAC review; the National Audit Act, 1983 created the National Audit Office and made the C&AG an officer of the House of Commons; the 2011 Act added a governing NAO Board.
• What India can learn: legislative involvement in appointment (UK, US), a long single term (UK, US), parliamentary control over the audit budget (UK), and enforcement powers (France, Japan). What India already has that others lack: constitutional status and a unitary audit of the Union and all States.

7.3 INTOSAI and the Lima Declaration

• INTOSAI (International Organisation of Supreme Audit Institutions), founded in 1953 in Havana, is the umbrella body of national audit offices; India is a founding member. Its regional groups include ASOSAI for Asia.
• Lima Declaration of Guidelines on Auditing Precepts (1977), adopted at the IX INCOSAI in Lima, Peru, often called the Magna Carta of government auditing:
  • independence of the Supreme Audit Institution, of its members and of its finances, anchored in the constitution;
  • both pre-audit and post-audit have value, post-audit being indispensable;
  • internal and external audit are distinct but should cooperate;
  • audit covers legality and regularity and also performance (economy, efficiency, effectiveness);
  • the SAI must have access to all records, report annually and independently to Parliament, and publish its reports.
• Mexico Declaration on SAI Independence (2007) set out eight principles of independence (legal framework, tenure, mandate, access, right and duty to report, freedom to decide content and timing, follow-up mechanisms, financial and administrative autonomy).
• The UN General Assembly endorsed the Lima and Mexico declarations (resolution of December 2011).
• Measured against these standards, India’s CAG scores well on constitutional status, tenure and mandate, but less well on freedom over the timing of publication (tabling depends on the executive), follow-up mechanisms and financial autonomy.

8. Theory Lens: Why Accountability Needs Accounts and Audit

8.1 Principal–agent theory

• Principal–agent theory (from the economics of the firm, notably Michael Jensen and William Meckling, 1976) studies relationships in which a principal delegates work to an agent whose interests may differ and who knows more than the principal (information asymmetry).
• Applied to public finance, there is a chain of principals and agents: citizens → Parliament → ministers → Secretaries → spending units. At each link the agent may shirk, waste or divert money (moral hazard), and the principal cannot see it directly.
• Accounts and audit are monitoring devices that reduce information asymmetry:
  • accounts are the agent’s report;
  • audit is independent verification of that report;
  • the PAC is the principal’s sanctioning mechanism.
• Independence matters because an auditor controlled by the agent (the executive) would not reduce asymmetry; hence the constitutional safeguards for the CAG.
• Limits of the theory: public agents serve multiple principals with conflicting goals (Parliament, ministers, courts, citizens), outcomes are hard to measure, and too much monitoring raises agency costs and induces defensive behaviour (the paralysis problem).

8.2 The Friedrich–Finer debate applied to financial accountability

• Herman Finer (1941) argued that democratic accountability requires external, objective controls: the official must answer to an outside body that can punish. Carl Friedrich (1940) argued that external controls can never catch everything; real responsibility comes from professional standards and inner conscience.
• In financial administration both are needed:
  • Finer’s side: the CAG’s statutory audit and the PAC are classic external controls;
  • Friedrich’s side: internal control, internal audit, professional accounting standards, the canons of financial propriety and the IFA’s advisory role rely on professional responsibility within the executive.
• The paralysis debate is a Friedrich–Finer debate in modern form: too much external control produces defensive compliance; too little invites misuse. The balance lies in strong internal controls plus credible external audit, with protection for bona fide decisions.
• Barbara Romzek and Melvin Dubnick (1987) distinguished hierarchical, legal, professional and political accountability; audit sits mainly in the legal type, internal audit in the hierarchical, and the PAC in the political.

8.3 New Public Management and the turn to performance audit

• NPM (from the 1980s) shifted public management from inputs and procedures to outputs, outcomes and managerial freedom: “let the managers manage” but hold them to results.
• Effects on audit:
  • from compliance audit to performance (VFM) audit;
  • from cash to accrual accounting and full costing of services;
  • outcome budgets and performance indicators as audit criteria;
  • risk-based internal audit and audit committees borrowed from the corporate sector;
  • auditing of agencies, contracts and PPPs, not only departments.
• Critiques:
  • Michael Power, in The Audit Society: Rituals of Verification (1997), warned that the spread of audit can produce rituals of verification that create comfort without real control, and that organisations reshape themselves to be auditable rather than better.
  • The 3Es can crowd out equity: an emphasis on cost control and economy can divert budgets from their older purposes of reallocating resources, stabilising the economy and promoting social equity. A cheap programme that excludes the poorest is “efficient” but unjust. Hence the push for a fourth E, equity, in performance audit and in outcome measurement.
  • New Public Governance (networks, PPPs, third-sector delivery) disperses accountability: when money flows through companies, societies and local bodies, the traditional chain (department → CAG → PAC) loses sight of it. This is why the CAG’s mandate over PPPs and local bodies has become the frontier issue.

8.4 Fiscal accountability, rules and populism

• Sound public finance has long been treated as the backbone of administration: without it no programme is sustainable. Pressures of electoral competition push governments towards freebies, untargeted subsidies, off-budget borrowing and deferred liabilities, whose costs fall on future budgets.
• Accountability responses:
  • Fiscal rules under the FRBM Act, 2003, with CAG compliance reviews under Section 7A (from 2012);
  • disclosure of extra-budgetary borrowings, guarantees and contingent liabilities in budget documents;
  • State Finances Audit Reports that expose off-budget borrowings, guarantees and unpaid liabilities in each State; the CAG’s 2025 decadal analysis showing States’ debt more than tripling in ten years;
  • accrual-based disclosure to reveal pension and guarantee liabilities hidden by cash accounts;
  • proposals for an independent fiscal council (made by the FRBM Review Committee, 2017, but not set up).
• The limits: rules have escape clauses, disclosure is not enforcement, and audit reports on State finances are rarely debated. Financial accountability can reveal populist fiscal choices; only the legislature and voters can correct them. The macro-fiscal side is covered in the article on fiscal policy and public debt.

Key Terms

Term	Meaning in simple words
Financial accountability	Duty of those who raise and spend public money to explain and justify its use to an authority that can correct them
Appropriation	Parliament’s legal authorisation to spend a stated sum on a stated purpose (Article 114)
Charged expenditure	Spending fixed by the Constitution or law that is not voted, though it is discussed and audited
Chief Accounting Authority	The Secretary of a ministry, answerable for its spending and accounts
Integrated Financial Adviser	Finance officer inside a ministry, answerable to both the ministry and the Finance Ministry (since 1975)
Controller General of Accounts (CGA)	Head of the Union’s accounting system in the Department of Expenditure (since 1976)
Departmentalisation of accounts	Transfer of accounting from the CAG to the ministries themselves (1976)
Consolidated Fund	The main account into which all revenue and borrowing go and from which all spending is made
Public Account	Money the government holds as banker or trustee (provident funds, deposits)
Contingency Fund	An imprest for urgent unforeseen spending, recouped after Parliament’s approval
LMMH	List of Major and Minor Heads: the uniform classification of government transactions
Cash accounting	Records transactions when cash is received or paid
Accrual accounting	Records transactions when value is created or consumed, showing assets and liabilities
GASAB	Government Accounting Standards Advisory Board, set up by the CAG in 2002
Finance Accounts	Annual statement of all receipts, payments, balances and debt
Appropriation Accounts	Annual comparison of grants voted with actual spending, explaining excesses and savings
Excess grant	Parliament’s later approval of spending beyond the grant, after PAC scrutiny (Article 115)
Regularity audit	Checks that spending was legal, authorised and within the grant
Propriety audit	Checks that spending was wise, faithful and economical
Performance (VFM) audit	Checks economy, efficiency and effectiveness of programmes
3Es	Economy (spending less), efficiency (spending well), effectiveness (spending wisely)
Internal audit	Management’s own continuous review of controls and operations
Social audit	Verification of records against ground reality by the community, in a public forum
Supreme Audit Institution (SAI)	A country’s national public auditor (the CAG in India)
Action Taken Note	Government’s reply on what it has done about an audit paragraph or PAC recommendation
Presumptive loss	An audit estimate of revenue foregone because of a decision, not money actually stolen

Commissions, Committees and Judgments

Body / case	Year	Key point
Government of India Act, 1919	1919	Statutory Auditor General; PAC set up in 1921
Government of India Act, 1935	1935	Auditor General of India, removable only like a Federal Court judge
Constituent Assembly (Ambedkar)	1949	CAG “probably the most important officer” under the Constitution
Estimates Committee	1950	30 Lok Sabha members; economy and efficiency of estimates
Appleby reports	1953, 1956	Criticised detailed financial control and audit as sources of delay and timidity
Krishna Menon Committee; COPU	COPU from 1 May 1964	Separate parliamentary scrutiny of public undertakings
PAC Opposition chairmanship	1967	Convention of an Opposition member as PAC chairman
CAG (DPC) Act	1971	Duties, powers and conditions of service of the CAG
Scheme of Integrated Financial Adviser	6 October 1975	One financial adviser inside each ministry, answerable to it and to Finance
Departmentalisation of Union Accounts (Transfer of Personnel) Act	1976	Separation of accounts from audit; CGA created
GASAB	12 August 2002	Accounting standards for Union and States
Twelfth Finance Commission	2004	Recommended accrual accounting
CAG Task Force on internal audit	2006	Internal audit weak; Chief Internal Auditor proposed
2nd ARC, 14th Report	April 2009	Internal audit, Audit Committees, accrual pilots, timely CAG reports, fund-flow tracking
FRBM Act, Section 7A	2012	CAG review of compliance with fiscal rules
Centre for PIL v. Union of India	2012	2G licences cancelled
Association of Unified Telecom Service Providers v. Union of India	17 April 2014	CAG can examine records of private telecom firms sharing revenue with government
Manohar Lal Sharma v. Principal Secretary (Supreme Court)	2014	Coal block allocations cancelled
Manohar Lal Sharma v. Principal Secretary (Delhi High Court)	13 August 2014	Upheld the appointment of the CAG; no prescribed selection procedure
Auditing Standards for Social Audit (MoRD with CAG)	December 2016	Standards for MGNREGA social audits
Kingston Cotton Mill (English Court of Appeal)	1896	The auditor is “a watchdog, but not a bloodhound”

Contemporary Developments

• September 2025: the CAG released its first decadal publication on State finances, showing the combined public debt of 28 States rising from ₹17.57 lakh crore in 2013–14 to ₹59.60 lakh crore in 2022–23 (about 23 per cent of GSDP).
• 25 February 2025: the CAG’s report on the Delhi Excise Policy 2021–22, tabled in the Delhi Assembly after a change of government, estimated a revenue loss of about ₹2,002 crore and was referred to the Assembly’s PAC, highlighting the executive’s control over when audit reports are tabled.
• 21 November 2024: K. Sanjay Murthy, a 1989-batch IAS officer and former Higher Education Secretary, was sworn in as Comptroller and Auditor General of India, succeeding Girish Chandra Murmu.
• 24–25 September 2024: at the 16th ASOSAI Assembly in New Delhi, the CAG of India assumed the chair of ASOSAI for 2024–2027, with a focus on technology-driven audit and the audit of local bodies.
• August 2024: K.C. Venugopal was named chairman of the PAC for the 18th Lok Sabha, continuing the convention of Opposition chairmanship begun in 1967.
• December 2023: an analysis of tabled reports showed only 18 CAG audit reports on the Union laid in Parliament in 2023, against an average of 40 a year in 2014–2018, prompting concern about declining audit output.
• August 2023: performance audits of Bharatmala Pariyojana Phase I (Dwarka Expressway at ₹250.77 crore/km against ₹18.20 crore/km approved) and Ayushman Bharat–PM-JAY (7.49 lakh beneficiaries on one dummy mobile number) showed the shift to data-driven performance audit; the PAC later examined the Bharatmala report.
• 13 July 2023: the Department of Expenditure notified SNA-SPARSH for just-in-time release of Centrally Sponsored Scheme funds through PFMS and the RBI’s e-Kuber, reducing idle balances outside the Consolidated Fund.

Revision Grid

Thinker / body	Work or report (year)	Key idea
B.R. Ambedkar	Constituent Assembly debates (1949)	CAG probably the most important officer; guardian of the public purse
L.D. White	Introduction to the Study of Public Administration (1926)	Purposes of public accounts: fidelity, information, control, aid to audit
James C. Charlesworth	Definition of audit	Audit checks spending against the legislative instrument of appropriation
Paul Appleby	Reports on Indian administration (1953, 1956)	Detailed financial control and audit breed delay and timidity
Ashok Chanda	CAG (1954–60); writings on Indian administration	Audit as a valued ally of administration, not a necessary evil
S.L. Goel	Writings on financial administration	Preventive, curative and promotive roles of audit
Lord Justice Lopes	Kingston Cotton Mill (1896)	Auditor a watchdog, not a bloodhound
Carl Friedrich / Herman Finer	Debate on responsibility (1940, 1941)	Inner professional responsibility vs external control
Romzek and Dubnick	Accountability in the public sector (1987)	Hierarchical, legal, professional, political accountability
Jensen and Meckling	Theory of the firm (1976)	Principal–agent problem; monitoring reduces information asymmetry
Michael Power	The Audit Society: Rituals of Verification (1997)	The spread of audit can become ritual verification
INTOSAI	Lima Declaration (1977); Mexico Declaration (2007)	Independence, pre- and post-audit, performance audit, publication
Twelfth Finance Commission	Report (2004)	Accrual accounting for Union and States
2nd ARC	14th Report, Strengthening Financial Management Systems (2009)	Internal audit, Audit Committees, accrual pilots, timely and balanced audit
Vinod Rai	CAG (2008–13)	Pressed for amendments to the 1971 Act: time-bound replies and tabling, audit of PPPs and PRI-routed funds
K. Sanjay Murthy	CAG from 21 November 2024	Current CAG; first decadal State finances publication (2025)