Coal Gate Scam – Should Auditors Comment on Policy Decisions?

The Coal Gate Scam report has squarely put the loss of Rs. 1.86 lakh crores (USD 35. 097 billion) at the Prime Ministers door. Comptroller and Auditor General (CAG) report states that Prime Minister Manmohan Singh agreed to introduce competitive bidding for allocation of coal blocks way back in October 2004. However, his office indulged in delay tactics of approving the revised policy. This resulted in allocation of coal blocks according to the old policy introduced in 1993. Failure to use competitive bidding resulted in a loss of Rs. 1.86 lakh crores (USD 35.097 billion).

This raises interesting questions from the corporate sector perspective. Should auditors see the validity and applicability of policies? Alternatively, should they restrict their role to the compliance of existing policies?  What happens when a policy or standard operating procedure of an organization is redundant however is still being followed? If competitors are using better processes, technology and policies than the organization, what role should auditors play in it?

1.     Delaying Policies Becomes a Political Game

According to the CAG report, the Screening Committee allocated blocks and the process lacked transparency. Allegations are that private companies with political links benefited at the expense of others. However, competitive bidding policy could have been introduced with an amendment from the administrative desk. Prime Minister’s role becomes critical as he was also fulfilling the responsibilities of Minister of Coal. CAG says he made it into a bigger issue that the policy should be changed for all minerals and not just coal; hence the process for making such large-scale policy change was different. This allowed the coal ministry to follow the 1993 process.

This happens in the corporate sector too. For instance, an employee or a small group suggest a change to an existing control process that will take just one man-month effort. Some others with vested interests do not wish for the change to occur. However, they can’t reject the suggestion for strengthening controls without looking bad. Hence, to stall the project, they add a few more suggestions which make the project larger into 24 man-months effort. Now the change can only happen once the huge budget is approved. Since, the project is not priority; it stays on the bottom of the budget approval list. Hence, status quo remains and subsequently someone exploits the control weakness to conduct a fraud.

In such a situation, as an internal auditor would you highlight the initial attempt to strengthen controls and put responsibility on the other group for delaying the change? Do we as internal auditors go back in such depth to find out what projects or policies were kept pending approval and they had such a huge negative impact?

2.     Auditor’s Role in Policy Review

The Supreme Court has upheld CAGs power to comment on policies. Justices R M Lodha and A R Dave bench said “Do not confuse the constitutional office of CAG with that of an auditor of a company or corporation.” This response was in respect to a petitioner’s contention that CAG should restrict itself to auditing expenditure and not comment on the government’s rational of policy decisions. The bench had further added – “CAG is not the traditional Munimji to prepare only balance sheets. It is constitutionally mandated to examine the efficiency, effectiveness and economy of the decisions of the government in using resources. If the CAG will not do this, then who will?

This viewpoint raises some interesting points for internal auditors in the corporate world. Should auditors be commenting on strategic or policy decisions of the company?

For instance, the company decides to use print media for advertising open job positions. However, it is much cheaper to use job portals and social media. These significantly reduce the cost of recruitment. Should an auditor restrict himself to checking that all expenditure is authentic or question the hiring policy?

Another aspect is the strategy decisions. Let us say, Company A decided not to enter into the emerging markets, whereas Company B operating in the same industry entered the emerging markets and increased the profitability tremendously. Should an auditor audit strategic decisions, and not just say that it is management responsibility. Where is the line of demarcation drawn in respect of corporate internal audit?

Institute of Internal Auditors new standard applicable from 2013 ‘Achievement of the organization’s strategic objectives’ states that – “The internal audit activity must evaluate risk exposures relating to the organization’s governance, operations, and information systems regarding the achievement of the organization’s strategic objectives”.  Hence, should we conclude that evaluating strategic decisions comes under internal audit purview?

3.     Auditor’s Role in Calculating Presumptive Loss

The CAG audit reports on 2G licenses and Coal Block allocations have raised a storm due to the calculation of presumptive loss figures. The government’s contention is that CAG should not be calculating the opportunity loss, as policy decisions are taken to benefit the public.

CAG however, contended that – “We had never commented on government policies, neither did we ever say that auction was the only route or that all natural resources should be auctioned. In both 2G spectrum licences and coal block allocations, we had only commented on the ‘effectiveness or non-implementation’ of policies. The presumptive loss or windfall gain figures are only to highlight the serious issues of an act of commission during implementation of government policies.”

In the corporate world, internal auditors make an observation and restrict their recommendations to suggest improvements. In rare cases, a cost-benefit analysis is done on the impact of the control weakness. We generally fail to draw management attention to the seriousness of the issue, as they are no numbers given. Should corporate internal auditors change their approach to audit work to give a cost-benefit analysis for their observations? Will that garner more attention from the management and initiate action?

Closing Thoughts

These are questions worth debating about and there are no easy answers. The business world internal auditors can learn quite a few lessons from the government auditors. They are doing a good job of raising contentious issues. Below is a poll to assess your views.

References:

  1. CAG not a ‘munimji’ of govt’s balance sheet: SC
  2. CoalGate: CAG does not let Manmohan, PMO off the hook
  3.  Performance Audit of Allocation of Coal Blocks and Augmentation of Coal Production (Ministry of Coal)