Should private companies be subject to CAG audits?

According to the constitution of India and other legislation, the Comptroller and Auditor General of India (CAG) has the power to conduct audits of the consolidated funds of the central and state governments. Recently, in a writ petition before Delhi High Court, the question arose whether the CAG can exercise this statutory power to conduct an audit of the accounts of private companies that contribute revenue to the consolidated funds. In this case the private companies were providing telecom services under a licensing agreement executed with the central Department of Telecommunications (DoT).

Overreach of mandate?

To the casual onlooker, the audit of accounts of private companies by the CAG might appear to be a clear case of overreach by the CAG of its constitutional mandate, considering specifically that the accounts of private companies are required to be audited periodically according to the principles and procedures prescribed under legislation such as the Companies Act and the Income Tax Act. However, in determining the question before Delhi High Court, the court examined the provisions of the constitution and legislation which establish the powers and duties of the CAG and the provisions of the licensing agreement.

Court’s findings

The court held that since the licensee is required to contribute revenue into the exchequer of the central government, the licensee is under a contractual obligation to maintain its books of account accurately. The terms of the licensing agreement were interpreted to mean that the licensee had expressly undertaken the responsibility for the accounting of the revenue earned and shared with the central government. Therefore, the accounts of the licensee, to the extent of the revenue shared, were held to be the accounts of the central government and consequently the CAG had the power to audit them.

Akshay Jaitly is a partner at Trilegal and Anuja Tiwari is a senior associate. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad.