Understanding the Auditing of Local Bodies

Why is it in the News?

The International Centre for Audit of Local Governance (iCAL) was recently inaugurated in Rajkot, Gujarat. This marks a significant step towards setting global standards for auditing local governance bodies in India.

About iCAL

• Objective: iCAL is established as a collaborative platform aimed at setting global standards for local governance audits.
• Functions:
• Serves as a center of excellence for building the capacity of auditors.
• Enhances the independence of local government auditors to improve financial performance assessments and service delivery.
• Acts as a knowledge hub and think-tank to address grassroots governance issues.

Local Self-Governance and Its Audit

• Constitutional Amendments: The 73rd and 74th Constitutional Amendment Acts of 1992 introduced provisions for local self-governance.
• Panchayats: Established at village, block, and district levels.
• Municipalities: Formed as municipal corporations, municipal councils, and nagar panchayats.
• AuditOnline: Launched in 2020 by the Ministry of Panchayati Raj, this application conducts online audits of panchayat accounts, ensuring accountability in fund utilization. It was awarded the World Summit on Information Society Prizes 2023 by ITU.

Current Auditing Mechanism of Local Bodies

• CAG’s Role: The Comptroller and Auditor General (CAG) of India oversees the audit of local bodies under the CAG’s (Duties, Powers and Conditions of Service) Act, 1971.
• ELFA/DLFA: Examiner or Director of Local Fund Accounts in most states audit the utilization of funds granted to local bodies, working under CAG’s guidance.

Importance of Auditing Local Bodies

• Financial Accountability: Detects and prevents financial mismanagement and corruption, ensuring public funds are used correctly.
• Performance Evaluation: Provides a critical assessment of local bodies’ operations against benchmarks.
• Service Delivery: Audit findings can enhance public service delivery and strengthen local governance.
• Democratic Participation: Encourages citizen engagement and strengthens grassroots democracy (e.g., social audits).
• Public Trust: Improves accountability and instills confidence among citizens and stakeholders.
• Decentralisation: Identifies issues related to the devolution of functions, funds, and responsibilities, promoting effective decentralization.

Decentralisation & Inclusive Development

• Participation: Enables marginalized groups to participate in decision-making (e.g., Back to Village Programme in J&K).
• Tailored Solutions: Local governments address specific community challenges (e.g., road development in Vyara, Gujarat).
• Political Representation: Empowers marginalized sections through representation (e.g., 46% of PRI representatives are women).
• Development: Promotes local development through effective devolution (e.g., 5.17 crore assets under MGNREGA).
• Equity in Healthcare: Enhances access to health care through decentralization (e.g., WHO Alma Ata Declaration).
• Water Management: Utilizes traditional knowledge for sustainable resource management (e.g., Atal Bhujal Yojana).

Challenges in Auditing Local Bodies

• Poor Record Keeping: Incomplete and inconsistent financial records, lacking uniform auditing standards.
• Lack of Skilled Personnel: Shortage of qualified auditors leading to inadequate audits.
• Overlapping Jurisdictions: Confusion and inefficiencies due to division of auditing responsibilities among various agencies.
• Outdated Procedures: Old formats and procedures for maintaining accounts, despite increased responsibilities.
• Low Awareness: Limited public understanding of audit processes and their importance, reducing scrutiny and accountability.

Recommendations from the 2nd Administrative Reforms Commission (2nd ARC) for Auditing Local Bodies

To enhance the effectiveness of auditing local bodies, the 2nd Administrative Reforms Commission (2nd ARC) has outlined several key recommendations. These aim to improve the transparency, independence, and capacity of the auditing mechanisms for local governance bodies. Here’s a detailed look at these recommendations:

1. Simplification of Audit and Accounting Standards

• Objective: Ensure that audit and accounting standards and formats for Panchayats are user-friendly and understandable for elected representatives.
• Action: Develop standards that are straightforward, enabling elected officials to comprehend and utilize them effectively in overseeing financial matters.

2. Institutional Independence of Auditing Agencies

• Objective: Strengthen the independence of the Director of Local Fund Accounts (DLFA) or any other auditing agency responsible for local body accounts.
• Action:
• Independence: Make the office of DLFA or equivalent body independent from the State administration to avoid conflicts of interest and ensure objective auditing.
• Appointment: The head of this auditing body should be appointed by the State Government from a panel approved by the Comptroller and Auditor General (CAG) of India, ensuring transparency and accountability in the appointment process.

3. Legislative Oversight of Audit Reports

• Objective: Improve the scrutiny and discussion of audit reports on local bodies.
• Action:
• Presentation: Audit reports should be placed before the State Legislature.
• Discussion: These reports should be reviewed and discussed by a separate committee of the State Legislature, modeled on the Public Accounts Committee, to ensure thorough examination and follow-up on audit findings.

4. Access to Information for Auditing

• Objective: Ensure auditors have access to all relevant information and records necessary for a comprehensive audit.
• Action:
• Legal Provisions: Incorporate provisions in State Laws governing local bodies to guarantee that DLFA, designated authorities, or the CAG have unrestricted access to pertinent information and records needed for auditing.

5. Capacity Building for Local Bodies

• Objective: Align the capacity of local bodies with standards of accounting and auditing.
• Action:
• Capacity Development: Each State should ensure that local bodies are equipped with adequate resources, training, and infrastructure to meet established accounting and auditing standards.