SC ruling allows CAG to examine books of firms having revenue pacts with Govt

India Inc faces a new worry. Thursday’s Supreme Court ruling allowing the Comptroller and Auditor General (CAG) to audit the accounts of telecom firms has put on notice private entities that have specific, direct revenue arrangements with the Government in some sectors.

These companies may no longer be able to ward off a CAG audit on the plea that there is no specific legal provision for such an examination of their books.

The Supreme Court ruling will also apply to other sectors, as the court has set the principle, giving power to the CAG to audit private companies, said Lalit Kumar, Partner, J Sagar Associates, a law firm.

PPPs also under lens

The CAG sword also hangs over public-private partnerships (PPP), say legal experts. PPPs, mainly in the form of special purpose vehicles, have so far managed to shield their books of accounts from the CAG, citing the absence of a specific legal mandate for such an audit.

Create precedence

“But this Supreme Court ruling will create precedence. It will apply to private companies in other sectors also. Regulators of various sectors may, on the strength of this ruling, start requesting CAG to undertake performance audits of companies they regulate,” said G Ramaswamy, a former President of the Institute of Chartered Accountants of India (ICAI), speaking to Business Line.

Companies involved in businesses that exploit natural resources, such as coal, iron ore and crude oil, may come in for scrutiny.

This CAG audit, however, may not apply to loss of revenues from income tax or any indirect tax.

Terms of reference

While the Supreme Court ruling will affect private companies in other sectors, the terms of audit would be relevant, says Aseem Chawla, Partner, MPC Legal, a law firm.

The scope and contours of any CAG audit should be done through a consultative process involving all stakeholders; care should be taken that such audits do not result in an over-reach where propriety and business expediency become the subject of scrutiny, he added.

Multiple audits

Corporate entities are already subject to a variety of audits to provide comfort to various stakeholders.

A few corporate observers are of the opinion that the Supreme Court ruling may go against the effort to improve the business climate and make it easy for companies to work in India.

(This article was published on April 18, 2014)
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