CHAPTER 1: The Purpose of Accounts and Audit
An Introduction to Indian Government Accounts and Audit
PART I
A PRELIMINARY SURVEY OF ACCOUNTS AND AUDIT SYSTEMS
CHAPTER 1
The Purpose of Accounts and Audit
1. Subject matter. The object of this book is to give a broad idea of the activities of the “Indian Audit and Accounts Department”, the term meaning the officers and establishments, subordinate to the Comptroller and Auditor General of India, that are employed upon the audit or upon the compilation of and audit of the accounts of the Union and of the States. Before discussing the principles of that particular branch of accounts and audit with which this department deals, it is desirable to have a clear conception of the word “com- pilation and audit of the accounts”.
2. Accounts and Transactions. The word “accounts”, in the financial sense, has been defined as statements of facts relating to money, or things hav- ing money value. The facts that are incorporated in accounting records are described as “transactions”.
3. Accounting. A mere chronological register of pecuniary transactions (commonly called a Cash Account) is soon found to be insufficient. From such a register a man cannot tell, without going through every item, how he stands in relation to his various customers, and whether his business is profitable or not. It becomes necessary that his transactions should also be classified under various heads, as for example the names of various customers dealt with, or of various articles dealt in and that the result of transactions under these heads should be arranged in such a form as to show clearly not merely the significance of each separate transaction but also the combined effect of any desired series of transactions. The process through which these ends are effected is called “accounting”.
4. Compilation of Accounts. To compile is to compose and arrange mate- rials collected from other records. As will be explained later, the initial ac- counts of Government transactions in India are prepared by the authorities through whom the transactions occur, those authorities being unconnected with the Indian Audit and Accounts Department. So far as accounts are concern- ed, the duty of the Indian Audit and Accounts Department is to compile, under different heads prescribed for Government account, those initial accounts which under the rules are required to be rendered to it for compilation, and to arrange the results of transactions under those heads in such a form as to bring out the combined result of all the transactions which occur during a given period. It has also to compile the Combined Finance and Revenue Accounts of the
Union and the States Governments which embody a summary of the accounts compiled both by the Department itself and by other agencies and include the results of the whole of the Government transactions arising both in and outside India.
5. Audit. The functions of Audit are essentially different from those of Accounts. Of the meaning of the word “audit”, an excellent explanation can be given by quoting the following portion of a translation of Sir Walter Henley’s “Tretyce off Husbandry”, a work which dates back to the thirteenth century.”
“Buy and sell in season through the inspection of a true man or two who can witness the business, for often it happens that whose who render accounts, increase the purchases and diminish the sales. Have an inspection of account, or cause it to be made by some one in whom you can trust, once a year, and (have a) final account at the end of the year. If there is any (money), let it be raised and taken from the hands of the servants appear in the final account, let them be speedily raised If arrears Look into your affairs often, and cause them to be reviewed, for those who serve you will thereby avoid the more to do wrong and will take pains to do better. In the first place he who renders accounts ought to swear that he will render a lawful account and faithfully account for what he has received of the goods of his lord, and that he will put nothing in this roll save what he has to his knowledge spent lawfully, and to his lord’s profit And then, if he has rendered account before, see how it compares; and if he is found in arrears of money, corn, or stock, put the whole in stated money valuation, and charge it at the commencement of his roll At the end of the year, when all the accounts shall have been rendered of the lands, the issues, and all expenses of the manor, take to yourself all the rolls, and by one or two of the most intimate and faithful men you have, make very careful comparison with the rolls of the accounts rendered, and of the rolls of the estimate of corn and stock, and according as they agree you shall see the industry or negligence of your servants and bailiffs.
“The lord of the manor ought to command and ordain that the accounts be heard every year, not in one place but on all the manors, for so can one quickly know everything and understand the profit and loss The auditors ought to be faithful and prudent knowing their business and all the points and articles of the account in rents, outlays and re- turns of stock. And the accounts ought to be heard at each manor to know the profit and loss, and then can be the auditors take inquest of the doings which are doubtful, and hear the plaints of each plaintiff and make the fines. The steward ought to be joined with the auditors, not as head or companion of the account, but as subordinate, for he must answer to the auditors on the account for his doing just as another. It is not necessary so to speak to the auditor about making audits, for they ought to be so prudent, and so knowing in their business, that they have no need of others’ teaching about things con- nected with the accounts”.
6. Special attention is invited to the clause which says that the lord of the manor ought to command that the accounts be heard every year. This shows that the word “auditor” is derived from the Latin “auditor”, the ancient practice being that the parties whose accounts were audited should attend before the auditor and vouch them orally. The practice was perhaps necessary in by- gone days when few people could read or write. It is possible even that the auditor himself could not read but heard the accounts read out by the clerks. The men responsible for the accounts vouched for the accuracy of the entries, and the auditor being specially chosen for his prudence, faithfulness and know- ledge of the business, was able to satisfy the lord of the manor that the ac- counts rendered accurately portrayed the exact state of affairs.
7. Auditor. “Audit” is therefore an instrument of financial control. In its relation to commercial transactions, it acts as a safeguard on behalf of the proprietor (whether an individual or a group of persons) against extravagance, carelessness or fraud on the part of the proprietor’s agents or servants in the realisation and utilisation of his money or other assets, and it ensures on the proprietor’s behalf that the accounts maintained truly represent facts, and that expenditure has been incurred with due regularity and propriety. The agency employed for this purpose is called an “auditor”.
8. It is essential that a similar watch should be maintained over the finan- cial transactions of a Government, and that the agency employed for the pur- pose should be independent of the agents or servants of Government who are entrusted with the realisation and utilisation of public money or other assets. This task is entrusted in India to the Indian Audit and Accounts Department. So far as its audit duties are concerned, the position of the Indian Audit and Accounts Department in relation to Government transactions is to a large ex- tent similar to that of an “auditor”. In this context, Parliament/Legislatures may be regarded as the Share-holders of the “Government concern” and the Executive Government as its directors. The object of this “concern” is how- ever not profit making. The Indian Audit and Accounts Department audits the transactions of the executive on behalf of Parliament/Legislatures and sub- mit its audit report to the President/Governor for being laid before them. That Department must ensure that the account maintained truly represent facts, that the rules and orders framed by competent authority in regard to financial matters have been obeyed, and that the expenditure has been incurred with due regularity and propriety; and that there is no wasteful expenditure on any scheme.
9. Fundamental Principles. Before leaving this introduction to the subject, attention may be drawn to the way in which the principles enunciated 700 years ago in the extract quoted in paragraph 5 still apply, as will be shown in this Com- pilation. Prompt payment of money into the treasury, the strict following up of arrears, the necessity for accounts accurately portraying the facts, the value of checking the accounts and of conducting local inspections, periodical stock verification and the check of stock with the accounts, were fundamental princi- ples then as they are to-day. Principles which have held good for so long a period must contain the essence of importance.