Sample Material of Public Administration Study Kit (Paper -
Financial Administration: Accounts and audit
Francis Oakey defines the term as “Accounting is the science
of producing promptly and presetting clearly the facts relating to financial
conditions and operations that are required as a basis of management.” In the
words of L. D. White “The primary functions of a system of accounts are to make
a financial record) to ‘protect those handling funds to reveal the financial
condition of the organisation in all its branches or purposes at any time to
facilitate necessary adjustments in rate of expenditure, to give information to
those in responsible positions on the basis of which plans for future financial
and operating programmes can rest, and to aid in the marking of an audit.”
Accounting means maintaining a proper record of the finances
of the organisation. Maintenance of accounts is the function of the spending
authorities or the executive. Proper maintenance of accounts also show the legal
use of funds, and on the basis of Account report, the spending officers justify
expenditure to the superiors. Through a proper system of accounting wrongful use
of funds can be prevented. Accounting has to ensure that funds have been legally
used for the purpose for which the Parliament sanctioned it. Accounts should
furnish data regarding the financial operations and should also secure fidelity
on the part of spending authorities. The spending authorities should produce
receipts or vouchers concerning every penny which they spend.
Thus, Accounting has a dual function to perform:
First is the determination of the fidelity of all officers who handle the
Second is the furnishing of information needed regarding financial condition
and operation of policy-determination and administrative purposes.
Types of Accounting System
The important systems of accounting followed at present are:
1. Double-entry Book-keeping: It is the system of
accounting in which every item of expenditure is entered at two places. One
entry remains with the operating service while another is sent to the Accounts
Office if there is a separate department of the Government or to the controlling
officer of the same service.
2. Cost Accounting: It is the determination of
inclusive costs per unit. It may be applied in production, e.g., the unit cost
of commodity manufactured in a government factory. This system is mostly made
use of in the Public Works Department because this Department had a reputation
By this system costs may be compared in a single institution
or a single operation over successive periods of time and the comparative costs
of similar operations in different agencies or in different jurisdictions may be
3. Cash System: The cash system of accounts records
transaction only when cash has been actually received or disbursed, while the
accrual system records transactions at the time of commitment is made. Thus cash
system disregards all operations of the actual type and seeks to record only
those operations in which an actual transfer of cash has taken place. It gives
us no information regarding the accrual of assets and liabilities but gives data
regarding liquidation alone. Government mostly make use of the cash accounting
system because it is simple.
4. Accrual Accounting System: It is that system of
accounting by which the right to a receipt, or the obligation to make a payment,
is established or is technically called, accrues. Under this system appropriate
entry is made in the account books of all actions having for their result an
undertaking with the right to an asset or placing it under an obligation to pay.
This system is followed in France.
Audit is a systematic examination, of the books and records
of a business or other organisation in order to ascertain or verify, and to
report upon, the facts regarding its financial operation and the results
thereof. Audit is a process of ascertaining whether the administration has spent
or is spending its funds in accordance with the terms of the legislature which
appropriated the money. Thus the main purpose of audit is to fix the
responsibility of the officers of the government for any illegal or improper use
of funds. An independent audit is necessary because it protects the state
against misappropriation of funds.
Types of Audit
Audit may be broadly classified as Audit of Appropriations
Accounts and Audit of Public Undertakings. Appropriations Audit is to ensure
that the funds voted by the legislature are utilised by the executive for the
purposes for which they were intended with due regard to economy and efficiency.
It comprises: (a) audit from the point of view of accountancy and
classification; (b) audit from the point of view of authority; (c) audit
appropriation and finance accounts; and (d) audit from the point of view of
Audit of accountancy is to see that the final accounts give a
complete and true picture of the financial transactions. It is meant to check
and detect frauds and technical errors in accounts. The booking of expenditure
against the appropriate head and checking of supporting vouchers are part of
Audit of authority is meant to ensure that those who incurred
the expenditure had the requisite authority. Cases where expenditure has been
incurred in the absence or in excess of the requisite authority are highlighted
in the audit report.
Audit of appropriation is the most important part of
obligatory audit. The primary duty is to see that the amounts authorised by the
legislature are utilised for the purposes for which they are intended.
Appropriations audit is to draw the attention of the legislature about
overspending and under spending.
Audit of propriety is to detect cases of extravagance and
waste even when expenditure formally conforms to legality and regularity.
Improper use of stocks and stores, unsound canons of financial administration,
etc., fall within the audit of such ‘higher audit’.
Audit of public sector undertakings pertains to statutory
corporations and government companies which have grown in number and variety
both at the centre and in the states. These enterprises were given greater
operational freedom. The accountability of autonomous statutory corporations is
assured by their relevant statues for the maintenance of accounts as prescribed
and their audit by an independent authority. Some are audited directly by the
CAG and some others are entrusted to private firms of Chartered Accountants. CAG
may conduct supplementary audit of these enterprises.
SEPARATION OF ACCOUNTS AND AUDIT
A considerable controversy has arisen with regard to the
Indian practice of combining accounts and audit functions, which on the face
seems highly incongruous. The system of combination of Accounting and Auditing
in India has been the legacy of the British Administration, who had introduced
it here on the grounds of economy and expediency contrary to the system followed
in their own country. Although the system had come under review and attack from
every reform committee, but it has continued, even after the adoption of the
During the early fifties various pronoun- cements were made
by the Public Accounts Committee to the effect that the existing system was
fundamentally wrong in. principles, and recommended that the CAG should be
relieved of his accounting responsibilities. It argued that the present
arrangement under which the spending authorities are not responsible for the
maintenance of a complete and up-to-date account relating to the transactions
for which they are themselves accountable, and the responsibility for ‘which
should lie on outside authority, is highly defective. As a result the Government
in 1955 accepted in principle the separation of audit and accounts.
The Comptroller and Auditor General’s (Duties, Powers and
Conditions of Service) Act which was passed in 1971 visualised the need for
separating accounts from audit. In June 1975, the Government of India approved a
scheme of departmentalization of accounts in a phased manner in all the Central
Ministries and Departments. It was completed by October 1976. The requisite
accounting personnel were transferred from the CAG’s establishment from 1978,
the CAG is relieved of the duty of maintaining the accounts of the Union
Government. The accounts of the State governments, continues to be compiled by
Under the New system, the Secretary of the Ministry is the
Chief Accounting Authority for all transactions of the Ministry and its attached
and subordinate offices. He discharges this responsibility through and with the
assistance of the Financial Adviser. The Secretary, as the Chief Accounting
Authority, has a total and overall responsibility for the efficient working of
the payment and accounting set up.
On behalf of the Chief Accounting Authority the Financial
Adviser is responsible for the preparation of the budget of the Ministry and its
department, for arranging payments sanctioned by the Ministry, for consolidation
of the accounts for the Ministry as a whole, for the preparation of
Appropriation Accounts for the Grants Controlled by the Ministry, for ensuring
accuracy of accounts and efficiency of operation, and for the introduction of an
efficient system of management best suited to the functional requirements of the
Ministry and its departments.
Under the Financial Adviser, there is the Principal Accounts
Officer of the Ministry/Department of appropriate status heading on Accounts
Department. His office is not only the Pay and Accounts office for the
Headquarters Secretariat but also in charge of consolidation of accounts
rendered by subordinate Pay and Accounts Offices. The attached and field offices
of the Ministry are grouped under one or more Pay and Accounts Offices depending
upon their size and spread. Each Pay and Accounts Officer is under the charge of
an Accounts Officer and is manned by trained accounts staff.
The Pay and Accounts offices render monthly compiled accounts
to the Principal Accounts Officer of the Ministry. He prepares the accounts of
the Ministry as a whole by the end of the subsequent month. When approved by the
Financial Adviser, these accounts are sent to the Controller General of Accounts
in the Ministry of Finance who is responsible for establishing and maintaining a
technically sound accounting system in the departmentalized offices, administer
the accounting cadres and consolidate the monthly civil accounts which is now
being done by the Accountant General, Central Revenues.
Controller General of Accounts
The Controller General of Accounts is the apex accounting
authority of the Central Government and exercises the powers of the President
under Article 150 of the Constitution for prescribing the forms of Accounts of
the Union and State Governments on the advice of Comptroller and Auditor General
of India. The Controller General of Accounts is responsible, inter alia, for:
1. Preparation and presentation to the Parliament of the Annual Appropriation
Accounts (Civil) and Finance Accounts of the Union Government.
2. Ensuring a sound and effective internal audit and pre-check system in the
3. Preparation and consolidation of the Union Government Monthly Accounts.
4. Government disbursements and banking arrangements of the
Ministries/Departments of Government of India. It closely, monitors the extant
system by means of periodical interaction with the Reserve Bank of India and
Public Sector Banks on an ongoing basis.
5. Monitoring of expenditure in Civil Ministries through prompt and accurate