Auditing of Local Bodies

Posted 22 Aug 2024

Updated 29 Aug 2024

5 min read

Why in the news?

Recently, International Centre for Audit of Local Governance (iCAL) was inaugurated in Rajkot, Gujarat.

More on news

Do you know? Local Audit Department was first created in 1880 to audit the accounts of municipalities and other local funds by an officer of the Finance Department known as Examiner of Local Accounts, attached to the office of Accountant General.

It is the first in country and aims to set global standards for auditing local governance bodies.
About iCAL
- It is a collaborative platform for policymakers and auditors and would serve as a centre of excellence for capacity building of auditors.
- It enhances independence of local government auditors to ensure improved financial performance assessment, and service delivery.
- It acts as a knowledge centre and think-tank for addressing governance issues at grassroot levels.

A graphical representation emphasizing the need for iCAL in India. It highlights five key points: enhancing collaboration among local bodies, aligning with global practices, assisting in achieving SDGs, fostering community engagement in global challenges, and addressing inefficiencies in fund utilization.

About Local Self Governance and its Audit

73rd and 74th Constitutional Amendment Act, 1992 added Part IX (Eleventh Schedule) and IX-A (Twelfth Schedule) respectively which contains provisions on local self-governance.
- It mandated that State governments constitute panchayats (at village, block and district levels) and municipalities (in form of municipal corporations, municipal councils and nagar panchayats) in every region.
- In 2020, Ministry of Panchayati Raj developed AuditOnline application to conduct online audit of panchayat accounts, ensure accountability in utilisation of funds at ground level.
  - It has been awarded the World Summit on Information Society Prizes 2023 at International Telecommunication Union (ITU), Geneva

An infographic titled "Constitutional Provisions" lists three articles: - Article 243 G: devolves power to Local Bodies. - Article 243 J: provisions for maintaining Panchayat accounts and auditing. - Article 243 Z: provisions for maintaining Municipality accounts and auditing.

Current Auditing Mechanism of Local Bodies
- CAG’s mandate for audit of Local Bodies flows from CAG’s (Duties, Powers and Conditions of Service) Act, 1971.
  - CAG exercises control and supervision over proper maintenance of accounts and auditing for all three levels of Panchayati Raj Institution (PRIs)/Urban Local Bodies (ULBs).
- ELFA/DLFA work under technical guidance and supervision of CAG.
  - It is done through Examiner of Local Fund Accounts (ELFA) or Director of Local Fund Accounts (DLFA) in most states. It audits utilization of funds granted by state government to local bodies.

Importance of Auditing of Local Bodies

Financial accountability: Audits safeguard public funds by detecting and preventing fraud, corruption, and financial mismanagement through rigorous scrutiny of expenditures and adherence to financial regulations.
Performance evaluation: Audits serve as a critical performance evaluation tool for local bodies in examining operations and comparing results against established benchmarks.
Service delivery: Audit reports findings, recommendation have potential of creating tangible difference in public service delivery, strengthen local bodies and foster grassroots democracy.
Democratic participation: Auditing activity strengthens governance by increasing citizens engagement e.g. social auditing under Mid-Day Meal Scheme.
Public trust: Auditors help government organizations achieve accountability and integrity, improve operations, and instil confidence among citizens and stakeholders.
Decentralisation: Audit observations/findings w.r.t. to status of devolution of functions, funds and functionaries aids in identifying issues, further strengthening decentralisation.

Decentralisation & Inclusive Development

Participation: Decentralization allows local communities, including marginalized groups, to have a say in decision-making processes, ensuring their participation in decision making process.
- E.g. Back to Village Programme (J&K) aimed at energizing Panchayats and directing development efforts through community participation.
Tailored Solutions: Local governments are better positioned to understand and respond to specific challenges faced by community.
- E.g. Development of road to enhance access to ambulance and hospitals for pregnant women in district Vyara (Gujarat).
Political Representation: Decentralisation aids in empowering marginalised and vulnerable sections of society by providing them representation.
- Elected women representatives constitute 46% of total PRI representatives.
Development: Decentralization promotes development at local level by effective devolution of powers, leading to tangible outcomes.
- E.g. As of December 2022, more than 5.17 crore assets have been constructed and geo-tagged under MGNREGA.
Equity in healthcare: E.g. WHO Alma Ata Declaration on Primary Health Care of 1978 promoted decentralization of services among communities to achieve greater equity in access to health care.
Water Management: Decentralisation brings government closer to people, aids in tapping traditional knowledge/practices to sustainably manage resources.
- E.g. Atal Bhujal Yojana aim to community led sustainable ground water management.

Thus, by empowering local bodies, augmenting their resources, capacity building of functionaries, monitoring and engaging stakeholders such as minorities, civil society organisation etc., local bodies can foster inclusive development.

Issues associated with Auditing of Local Bodies

Poor Record Keeping: Many local bodies’ financial records are incomplete, inconsistent, and further lack uniform auditing standards across different states and local bodies, leads to variations in the quality of audits.
Lack of Skilled Personnel: Local bodies often face a shortage of qualified auditors for maintaining accounts. This can lead to inadequate or superficial audits, missing critical issues.
Overlapping Jurisdictions: The division of auditing responsibilities between different agencies, such as state audit departments, local government auditors, and CAG can create confusion and inefficiencies.
Out-dated procedures: In many States, the formats and procedures for maintenance of accounts by local bodies were framed decades ago, and are continued without any improvements despite manifold increase in their powers, resources and responsibilities. (Eleventh Finance Commission)
Low Awareness: General public and local community members often lack awareness of the audit processes and their significance, leading to reduced public scrutiny and accountability.

Way ahead (2nd ARC Recommendations)

It should be ensured that audit and accounting standards and formats for Panchayats are prepared in a way which is simple and comprehensible to the elected representatives of PRIs.
The independence of DLFA or any other agency responsible for audit of accounts of local bodies should be institutionalised by making the office independent of the State administration.
- The head of this body should be appointed by State Government from a panel approved by CAG.
Audit reports on local bodies should be placed before State Legislature and these reports should be discussed by separate committee of State Legislature on the same lines as the Public Accounts Committee.
Access to relevant information/records to DLFA/designated authority for conducting audit or CAG should be ensured by incorporating suitable provisions in the State Laws governing local bodies.
Each State may ensure that the local bodies have adequate capacity to match with standards of accounting and auditing.