THE ROLE OF SUPREME AUDIT INSTITUTION IN PROMOTING GOOD GOVERNANCE

BYMuhammad Akram Khan

Former deputy Auditor General of Pakistan makram1000@gmail.com

Introductory

1. Good governance is a catch phrase. It has become recently popular in the wake of large scandals of corruption surrounding political leaders and heads of states in many countries. World Bank, United Nations, Asian Development Bank,, IMF, Transparency International are some of the agencies that have given currency to this term. It is variously defined but the essence of all these definitions can be summed up in the following main points:

2. Good governance means: Decision-making in the light of applicable laws, rules and regulations Transparency in decision-making Accountability of decision-makers Economy, efficiency and effectiveness in managing public resources Honesty, integrity and ethics in conducting the public business

3. Seen in the above perspective, the SAIs can play a vital role in promoting good governance.

Accountability

4. Accountability refers to the rendering of account by those responsible for managing some resources. In democratic countries, it refers to a system whereby the legislature authorizes the executive branch through a formal budget to collect and spend resources. The executive departments carry out their programs and compile the accounts. The SAI conducts audit of these accounts and reports back to the legislature about the truth and fairness of these accounts. This is the traditional concept of accountability. But in recent years, this concept has undergone a change. It is no more considered enough that the government departments render accounts of the financial transactions. They are also supposed to inform the legislature about the achievement of physical targets. For this purpose, the format of budgets and accounts is undergoing a change. Increasingly, the budgets are incorporating physical targets with time schedules and quality of delivery for various services and programs. The emerging concept of accountability makes public servants responsible for program results and achievement of objectives. Although this concept takes the traditional concept of accountability a step further, yet it leaves the precise role of an individual qua the

organization ambiguous. It is still not clear as to what shall be the responsibility of an individual if he violates an ethical rule for promoting the interest of his organization.

Transparency

5. For centuries, the rulers have enjoyed the fruit of secrecy. They have successfully kept the state matters away from the eyes of the public. It was with the advent of democracy, that the demand for information on government policies and decisions became prerogative of the parliaments. But despite this, the governments have been successfully hiding important information from the public representatives under various machinations. The situation is now rapidly changing. The mechanics of keeping information hidden are various. The government budgets, reports and accounts are usually published in such a manner that a non-technical person cannot make out much from them. Even technical experts find a large amount of this information highly complex. The present day concept is that the governments should disclose more information on its operations. The SAIs can play an effective role in ensuring that the information provided by the governments are adequate, true and fair. The focus of the examination by the SAI will be as follows:

In areas of fiscal administration, the SAI can report if the government disclosed all the necessary information and documentation to the public so that any rent seeking by individuals or corporate bodies becomes transparent.

The SAI can report to make the relationship between the government and the corporate sector transparent. In some cases, the corporate sector may be undertaking some activities that normally should be done by the government and vice verse. For example, Sui Southern Pipeline Company in Pakistan financed construction of a sports stadium in the province of Sindh on the verbal orders of the then Prime Minister. Similarly, the Capital Development Authority in Pakistan built a Polo ground in the Prime Minister's house. These activities came to notice on the reports of the Auditor General.

The SAI can report on the fiscal costs and terms of assistance private sector firms. These favors to the private sector may take many different forms: multiple exchange rates, exchange rate guarantees, import deposits, preferential credits, and loan guarantees. We can quote a concrete example from Pakistan. In case of a private power producer, HUBCO, in Pakistan the government provided undisclosed and undue benefits to the company worth billions of dollars. The Auditor General reported these irregularities in his report to the parliament.

The SAI can report on utilization of extra-budgetary funds. Many governments create funds for specific purposes, some of them quite legitimate, and do not present them to the legislature for necessary authorization. For examples in Pakistan, the government submits a one-line budget relating to defense expenditure. Similarly, it is selling its assets through privatization but the proceeds are kept out of the main books of account. Another example is the iqra surcharge, which it levied on all imports for providing resources to the education

sector. But there is no public information on the utilization of these funds. Even part of the zakah funds are being kept in the form of a reserve and then borrowed by the government without any authorization form the legislature. Although these funds are meant to meet specific needs, but since there is no system of oversight, the governments often use them for other purposes. Even though these other purposes may also be quite legitimate, but there should be system to make this transparent. The SAI can play this role. It can report on the management of extra-budgetary funds by the government.

The SAI can undertake audit of tax expenditures. These are tax preferences viewed as budgetary outlays benefiting certain households, enterprises, sectors or activities. They are in fact subsidies and have implications for income and wealth distribution. The SAI reports can analyze the effect of tax expenditures on income distribution pattern, since in an Islamic economy, reducing the income inequalities is one of the major policy objectives.

Corruption and fraud

6. There has been a recent upsurge of literature on corruption. It seems that suddenly the world has realized that the corruption is rampant both in developed as well as developing countries. Except for USA, most of the other advanced countries give tax break to their corporations for the amounts of bribes they have paid for getting international contracts. This shows the degree of tolerance about corruption. A survey of 3600 firms in 69 countries carried out in 1997 World Development Report provides evidence of widespread corruption in the world. According this survey, 40% of the entrepreneurs reported having bribed to get things done.

7. Although corruption and fraud are very complex issues and a multi-pronged effort is necessary to handle them, yet the SAI can also play an effective role in minimizing these menaces.

The SAI can report on situations of potential conflict of interest. One of the sources of corruption is absence or ineffective implementation of necessary laws against these situations. Examples are where doctors are diverting patients from hospitals to their private clinics or where private patients are being treated in hospitals using official equipment and resources. Other examples are where government employees are allowed to undertake consultancy work while remaining on the job. Thus the SAIs can draw the attention of the legislature in remedying such situations of conflict of interest.

Most of the developing economies are dependent on foreign loans. Without getting into the debate of the contribution of foreign aid in development, a general observation is that it has provided ample opportunities for corruption and fraud among the recipients. The foreign loans came as easy money and the end-users squandered it mercilessly to the peril of the already poor of these countries. The SAI can help in the proper utilization these funds. One concrete example is that of Pakistan. The donors for the Social Action Program, multi-billion dollar project for alleviating poverty and uplifting the rural areas, noted with concern that the

funds were being misused in several ways. First, there were ghost employees. Teachers, doctors, para-medical staff and sanitary workers existed only on paper. Second, the recruitment in schools and health centers was without any merit. There were reported cases of illiterate persons recruited as teachers under political influence. Third, the procurement of drugs, equipment and services was non-competitive, expensive and sub-standard. Fourth, the sites selected for building schools and health facilities was inappropriate. Influential people were able to sell their useless land consisting of ditches and marshes for building schools. These places were often far away from the populated areas where no one could visit. Thus, the public functionaries distributed the bulk of the foreign aid among themselves. The Auditor General of Pakistan took up the task of Third Party Validation of this program in 1998. As a result, a lot of pressure has been built on the executive departments to restrain corruption. There are other examples also. In Korea, the SAI carries out preventive auditing to check the physical progress of all works and vouch for their quality so that any misuse of resources could be prevented before it takes place. Based on these experiences, we can say that, given the mandate, the SAIs can play an effective role in fighting corruption and fraud in the government.

The government has a fiduciary relationship with its people. It manages a large number of public funds of its citizens purely on trust basis. But recently, examples have come to notice where irresponsible governments misused the trust funds surreptitiously and betrayed the confidence of the people. There was no one to protect the interest of the people against this government fraud. One glaring example is the freezing of foreign currency accounts of the Pakistani citizens by the Government of Pakistan on 29 May 1998. These accounts had deposits worth $ 11.630 billions. Successive governments had been using these funds for their extravagance without any authority or propriety. No one knew about this government fraud. The SAI could protect interest of the people by reporting on cash management of the government. In an Islamic economy, although we have the hope and the desire that the government will not commit such frauds yet the experience of human history shows that there is a little room for this idealism.

There is a growing awareness among the public against corruption and fraud in the government. The media has played an active role in uncovering frauds and corruption. One of the prominent examples is Watergate scandal in USA, Bofor scandal in India, Surrey Palace scandal in Pakistan. The SAI can take a lead from the media stories and make independent and objective investigations into these allegations. The reports of the SAI will provide a more reliable basis for action and policy formulation.

The SAIs can report on the governments' system of monitoring implementation of anti-corruption laws and its impact in obtaining fair value for money from public funds. The SAIs can evaluate the efficiency and effectiveness of anti-corruption agencies and possible avenues of corruption in those agencies.

The SAIs can review methods through which corruption is resorted to and suggests measures for improving the system against corruption. They can study the escape-routes and loopholes in the system, which facilitate corruption.

Performance auditing

8. The global economy is a place of strife and cutthroat competition. With the opening of borders, it will not remain possible for any country to rejoice in its inefficiency. The international competition will soon compel the slow-runners to buck-up or to get eliminated. As a result, the economies will have to be quite vigilant about their efficiency. Performance auditing is one technique that can help the economies remain efficient. Performance auditing is a recent expansion in the scope of auditing. The traditional auditing focused on the accuracy and fairness of financial records and final accounts. It examined the internal controls and expressed an opinion if the financial statement presented a true and fair position of the affairs of the audited body. In the domain of government auditing, the traditional approach also examined compliance with rules and regulations and propriety of financial decisions. This approach remained in vogue for centuries until seventies of the present century. In those days, the legislatures of some advance industrial countries started asking the then "awkward" question: have we received the value for money? The SAIs of these countries did not have a ready answer. But it compelled them to do some hard thinking. As a result, the discipline of performance auditing was born.

9. The performance auditing focuses on the economy in procurement of goods and service, efficiency in the use of resources and effectiveness in achieving the end-results. The objective of performance auditing is to see that the resources are well managed and that those who are responsible for certain results should also be accountable for their actions and omissions. Gradually, its techniques and approach have evolved and now there is a generally agreed framework for this type of auditing. Performance auditing is variously termed in different countries. But performance auditing remains the most popular remain. Whatever the name, the focus remains on three Es or economy, efficiency and effectiveness.

10. Interestingly, in this field, the SAIs have been in the forefront. The private sector auditors are still trying to grapple with the framework of performance auditing. In the present century, performance auditing will assume a still greater importance. This is because of the economic compulsions for going ahead in the global economy. Some of the applications of performance auditing in good governance are as follows:

The governments introduce various policies and programs with the avowed objective of "reform". Privatization, contracting-out and engaging NGOs in delivery of various services are some examples. But in most of the cases they do not turn back to see if the 'reforms' had been successful. The SAIs can report on the effectiveness of government reforms.

In the coming years, the new public administration concepts will force the governments to adopt more client-based policies. This will include such programs as complaint-handling mechanisms, convenient timings for various

services, availability of information on Internet and other media, timeliness of various services, etc.. This is all the more so in a democratic government which is supposed to be the "servant" of the people and not their "ruler". The SAIs can report on the ability of the governments in achieving the objective of better client service.

Evaluation of policies

11. The present day thinking in state auditing feels shy of saying that the SAI should audit the policies of the government as well. It is generally felt that the policies are the domain of the executive government and the auditors should not question them. The maximum to which an auditor may go is to see if the government employed a reasonable strategy for implementing a policy, without ever asking if the policy itself was appropriate. We think that this is going to change. The frontiers of public auditing will be extended further. The citizens will like to ask if a certain policy, despite being economical, efficient and effective was desirable from the broader social and ethical perspective. For example, the government may launch a program for modernizing an airport or imparting of certain skills to certain class of people. The citizens may ask: why these policies were adopted while certain more pressing (to their mind) needs were crying to be fulfilled? At present there is hardly any systematic arrangement for evaluation of policies, except for media reports and protests by citizens through newspapers and TV debates. These protests and reports may not be an objective and systematic assessment of the policies. The difference between performance auditing and policy evaluation will be that the former uses the criteria of economy, efficiency and effectiveness while the latter uses the broader criteria of social equity, fairness and justice. The former concentrates on the performance of various policies while the latter on the very legitimacy of those policies. The SAIs would be required to evaluate policies in this broader framework.

Audit of expenditure management systems

12. The traditional system of expenditure management does not go beyond allocating budgets on incremental basis. The finance ministries look into the expenditure of the last year and add a small percentage for the coming year. The budgeting and expenditure control does not follow any detailed analytical framework. But there is growing realization that this pattern of public financial management is inadequate and non-responsive to the needs of the people. The coming years will impose following types of compulsions on the budegteers:

There should be clear description of the physical outcomes from the budget allocation. Already some countries have adopted varied types of performance budgeting. This is going to be the order of the day in the coming millennium.

The budget should aim at macroeconomic stabilization. The budget should aim at inter-generation equity.

The taxpayer should have some choices in regard to the services to be provided by the government. It means, the local populace should be consulted in conceiving various schemes and projects.

The public agencies should aim at providing various services at specified rates, time and quality.

The cost of financial controls should be minimal. [It means greater empowerment of the executing agencies within a tight accountability framework.]

13. The SAIs will be expected to validate that these objectives of financial management are being met. The SAI can adopt various assumptions of the budget as its criteria and report back to the legislature if these assumptions were met fairly.

Audit of privatization

14. Privatization is the current rage in all countries of the world. In all probability, this will continue in the next century also. The SAI can play an effective role in this field. For example:

It can report on the costs borne by the government in restructuring the public enterprises or financial institutions before they are privatized. This information can be of immense value in evaluating the prudence of the decisions made.

The SAI can report if the timing of privatization was in the best public interest. There are genuine pressures on the government for privatizing certain assets and facilities such as to meet the fiscal deficit or to redeem the public debt. But such pressures should not be an excuse to injure public interest. The SAI could examine if key stages prior to privatization (such as selection of external advisers, putting the business into appropriate legal form, decision on the sale method, preparation of financial information, identifying and valuing the assets, valuing the business, marketing and negotiating the sale) were observed. If the government omitted some of these key stages, the SAI could analyze their effect on public interest.

The SAI can examine whether adequate safeguards were in place to secure that the sale was properly and honestly carried out. It can and investigate into allegations of improper practice, and establish whether there were any lapses in the procedures.

The SAI can ascertain that the management and employees of the state business subject to sale acted at all times competently and in a manner, which supported the integrity of the sale process effectively and served the best interests of the public.

The SAI can report whether the government provided equal information to all the bidders so that the criteria of fair play and justice was observed. Similarly, the SAI can report whether the government applied the criteria for evaluating bids fairly and objectively so that no one was put to an undue advantage or disadvantage.

The experience of Russia demonstrates that if privatization is not coupled with competitive markets, it can lead to higher prices, not lower, and less economic efficiency, not more. The SAIs can report on government policies that promote monopolies and discourage competition.

Evaluation of regulators

15. In the wake of privatization has come the realization that a strong regulatory framework is essential for protecting the interest of consumers. Privatization does not mean absence of government, even though we minimize the economic role of the government. It means, perhaps, a strong government, with adequate regulatory powers. The government should establish regulatory bodies besides in all sectors where privatization is being made. The regulatory bodies should be independent, competent, and transparent. They should clear goals and adequate authority to enforce regulation. The regulatory framework should protect consumers from exploitation, promote efficiency, guard against cross-subsidization and discrimination among competitors. It should provide a level playing field for all players. The investors should be encouraged by the presence of the regulators and not scared away by them. In this age, a modern economy will have to set up various regulatory bodies. But mere setting up regulatory bodies does not serve the purpose. It has also to be ensured that these bodies perform well and achieve their objectives. For this purpose the SAIs can be invited to carry out periodic evaluation of the regulatory bodies. The SAI can report on the effectiveness of the regulatory mechanism. This will be an extension in the role of the SAI in the coming century.

Audit of public debt

16. Ideally no country should borrow what it cannot repay. It should not borrow for unproductive purpose. It should not borrow what is not essential. It should make sure that the benefits of borrowed funds accrue to the society at large and are not expropriated by a privileged elite. In this perspective, the SAI can play an effective role. For example:

Audit reports on public debt of several countries have revealed that the accounting of public debt is in a bad shape. The governments do not adopt sound definition and disclosure policies to account for the public debt. As a result the public at large remain oblivious of the actual liabilities. The SAIs can play a leadership role in persuading the government to adopt sound and proper definition and disclosure practices for the accounting of public debt. The SAI can help in ensuring that the decisions with respect to public debt are based on the disclosure to all affected parties of complete and reliable information on the likely effects of the proposed borrowing. The SAI can provide audited debt figures, classifying them into various categories, such as interest costs, additional loans to pay off past loans, amortization existing loans, cost of loans as compared to the international market, cost of tied loans, leakage from the public debt, etc.

The SAI can report on the terms of public debt and the possible implications for inter-generation equity. The SAI may undertake independent analyses of the data disclosed to foster improved management of the debt and improved understanding of the current and future implications of public commitments. Some of the relevant ratios are: interest bite, expenditure ratio, tax bite, debt to GDP, debt service to exports, etc. The governments provide guarantees to the debts of the public sector corporations. Sometimes, they also bail out private sector companies with their guarantees.

Similarly, politicians under pressure of their electorates or because of emergencies make announcements for various benefits to certain groups of people. The real cost of such commitments remains hidden from the public eye. The SAI can carry out audits of such commitments or guarantees and report on their cost to the public.

Environmental audits

17. As the 20th century comes to a close there is a general awareness agreement that sustainable development hinges to a large extent on the ability of a country to protect its environment. Therefore, almost all countries are framing laws and policies to regulate industry and trade for protecting environment. Besides, huge amounts of investments are being made to launch programs for environmental protection. In the 21st century, this emphasis on environment is going to increase. In fact, the pressure form neighboring countries and global community will force each country to adopt suitable measures for protecting the environment.

18. In this area, also, the SAI can play a significant role. The environmental audits can focus on the following kinds of entities:

Entities which themselves impact on the environment whether that be positive or negative - for example, through rehabilitation of the environment or conversely, through pollution or utilization.

Entities with powers to make or influence environmental policy formulation and regulation - for example internationally, nationally or locally.

Entities, which have the power to monitor and control the environmental actions of others.

Leadership role in reforming government accounting

19. The SAIs can play a leadership role in helping the governments develop appropriate financial reporting and disclosure standards in the following areas:

Details of programs and their physical achievements for (a) alleviating poverty (b) reducing income inequalities (c) promoting justice and fairness (d) diluting economic power of various groups, agencies and corporations(e) reducing market imperfections and promoting competition

Performance indicators for various departments, agencies and programs

Analytical framework for deciding whether certain activities should be undertaken by the government or should be contracted out

Basis for measuring condition, age, and serviceability of physical infrastructure

Audit of social services and public administration

20. In public administration, the citizens like to have various types of information at least cost and in a manner that rent seeking is eliminated. What are the implications for an SAI in this environment? One conclusion is that audit can be extended to more than checking of faults and shortcomings of the system. The audit can look at various services from the perspective of citizens. It can also evaluate interface of the government information system with the information system of citizens and companies. The objective will be to see that the government has reliable means to receive feedback on various services it is providing. Another aspect will be to see if the government has adequate systems in place to provide sufficient information to the citizens regarding various changes in laws, procedures and systems.