Thursday, August 4, 2011

Intentionally abusing CAG reports.....

It’s not as if the BJP doesn’t understand the role of the CAG, but it chooses to wilfully abuse its reports. The media does the same thing, albeit for a different reason. It simply does not understand the subject! I have said this many times – the media in our country remains comparatively backward on matters that are not in the political domain. For eg, media’s understanding of economic matters is pretty poor. A top rates news channel doesn’t even know how to calculate percentages of variance! No media outlet understands the difference between “selling an equity stake” and “diluting equity”!

So let’s take the the CAG and all the controversies created by it head-on.

The CAG is the auditor of the central and state governments as well as of all bodies and companies that are funded wholly or substantially by the government. Its role is similar to the role of the statutory auditors in private companies that audit their quarterly and annual financial statements. An auditor’s report is mandatory and is an extremely important part of disclosures required as per various laws in the country. Just like many private entrepreneus indulge in “window dressing” their books of account, there are many government departments and companies also which do the same. The objective of such window dressing is usually to fool the investor. To hide some truth. It’s usually done to shore up profits if they are bad and scale down losses if they are too high. In short, to fudge the numbers. The statutory auditor’s job is to detect such attempts to dress up the accounts and to bring them to the notice of the higher ups. Since usually, window dressing involves creative application of rigid accounting laws, the auditor is expected to be an accounting expert who is well educated to question such creativity. In the private sector, the role of the auditor is extremely important.....and the auditor’s report is presented to the Audit Committee of the Board which by law has several “independent” directors on it. By law, the Chairman of the Audit committee of a listed company has to be an independent director. And in spite of its importance, the Audit Committee knows the limits of the auditors. Auditors are expected by definition to work take a “narrow” view of things.....and simply report anything that they think is a violation. They are not expected to provite any context. They are not expected to appreciate the reasons that management may provide for their observations. They are expected to “clerically” adhere to the letter of the law. That’s why, in addition to the auditor’s report, every Board places much importance on the management’s comments on the auditor’s report. A strong auditor helps unearth fraud. But all that an auditor unearths is not fraud. This is the distinction that our politicians like to selectively forget and our media simply doesn’t understand.

Let me give one example to prove this point. An auditor of a large company once told the audit committee that there had been wholesale undercutting of prices by the management of the company. And had the “rate cards” (made by the management itself) been followed, the company would have made double the revenues and many more times the profits. This is a real life example. The auditor’s observations are right and there is no point in questioning them. The auditor’s job is to make such observations. The audit committee of this company asked the management for an explanation. The management said that in the industry in which they operate, the rate card has very little value. Discounts are the norm in the industry. Every company in the industry does the same. And since buyers like to negotiate, companies keep their rate cards high. The Audit Committee debated this and found that this was indeed the practice in the industry. This was an industry “way of working” rather than a case of fraud. They thanked the auditors for their observations, but were satisfied with the response of the management.

Now take the CAG’s recent reports. I don’t know why they are called “indictments” at all. The CAG is nobody to indict anybody. They are just “reporters” of financial accuracy. Take the 2G report of the CAG. The CAG should have pointed out that Raja changed dates of submission of demand drafts and a few companies benefitted. Perfect! They should have said that ineligible companies were allotted licenses in violation of policy. Bang on! Many other observations of theirs point to fraud and they are all perfect. But the moment they say that giving licenses on first come first serve basis is wrong, they are stepping into the territory of policy. And Vinod Rai, the current CAG, has himself stated that getting into policy is not their mandate. The CAG may make certain observations, but the Public Accounts Committee – to which it reports and which is similar to the Audit Committee in a private company – has to be satisfied with the explanations given by the Executive (the government). That process is still underway in the 2G matter. The CAG made an observation that the country “lost” Rs 1.76 lac crores by giving away 2G licenses at ridiculously low prices. They shouldn’t have made this observation at all......and the PAC may well be satisfied that this is a matter of govt policy, not a fraud. The problem starts when the CAG starts to sensationalize matters and starts leaking reports to media – which as I explained earlier is totally ignorant on the subject. The media, in turn, starts tomtomming this observation as an “indictment”. Who said its fraud? Not the PAC yet. But media – with an eye on TRPs – already finds the CAG report to be an accurate indictment. And if – rarely – media calls a government representative to explain their stand, the person is made to shut up when he starts to explain! Media is forgiven for its lapses under the guise of “freedom of speech”. What about cheating viewers? Alas, the Constitution never envisaged that!

Now let’s come to the Sheila Dixit “expose”. First, let’s understand that there is no such thing as an “expose”. There is rarely any effort involved by a media outlet is “ferretting out” the information. The information “walks into” the media outlet in most cases. Government departments are full of people who want to “leak” information. They choose which media outlet to give the leak to! Let’s leave that aside. The CAG has pointed out that public funds were “wasted” in ensuring the beautification of Delhi during the CWG. Oh really? So it would be OK if the city looked like a ghetto while all the foreign attention was cast on our country? We shouldn’t put our best foot forward at an important event like this? I know the standard argument.....there are millions of poor in our country, and every single rupee should be spent on them.....This argument is basically an argument against holding the games at all.....well that’s a policy matter and the CAG has no role to play in it. The CAG of course doesn’t have to provide this “context” to their observation. This is for the government to say. Yet when Sheila Dixit said beautification was done in “national interest”, she came under scornful attack. Then the most ridiculous spin was provided by media. A comparison was made with “cost of laying of railway tracks”.....I cannot even start to understand this. Exactly what is the point here???? It’s like saying that India’s Chandrayaan satellite costed more than the reactor of a nuclear plant! Wow, what an observation! Profound! We cannot understand let’s just call it a scam! Of course, there are also other serious observations made by the CAG – notably the way in which the consultants were selected and higher costs being paid – and Sheila Dixit must answer those questions. I am not trying to defend her. But at least let the government provide the answers. Let the PAC look into it. Let the “verdict” be out. Till then, let’s all just shut up!

Of course, the BJP understand’s the CAG’s limitations. A panelist on Times Now last night was trying to point out how the CAG had “indicted” the Vajpayee government in 2004 on some Rs 60000 crore matters......of course; he was not allowed to even complete his sentence! I am trying to find out more about that and will surely report it in another post. The BJP obviously wants to use the CAG when convenient. And ignore it when not! Also, in a desperate attempt to get another CM to quit, the BJP is now comparing the CAG report on CWG with the Lok Ayukta’s genuine indictment of the Karnataka CM. Let me remind the BJP that the Lok Ayukta is like a judicial set-up. It has looked into actual evidence, and applied “context” to it. It has met with hundreds of “accused” and taken their responses into account. And it has then “pronounced its verdict”. It’s not an’s a verdict and an indictment with a recommendation for prosecution. Of course, it suits the BJP to compare the two. But what about media? Does media even understand the difference? I doubt it!

The real truth is that the CAG reports are just excuses for the opposition to embarass the ruling party. Nothing wrong with that. It’s a fair political strategy. But my complaint is with the media, which is expected to be independent. It’s because media does not bother to explore the truth that The Real Truth was started! And in spite of all accusations against this blog, The Real Truth will continue to provide context and logic to all the inane interpretations that keeps being doled out.....And try and restore the glory of the CAG to what it should stand for – The Comptroller and Auditor General of India!

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