The Supreme Court’s ruling that the Comptroller and Auditor General of India can audit private telecom firms that share their revenues with the government is a landmark one. The ruling has, at one stroke, extended the reach of the CAG from government and public sector companies to any entity that may be using a public resource in its business and sharing revenue with the government. The ostensible principle behind the ruling is that when the Executive deals with natural resources, such as spectrum, which belong to the people, Parliament should know how the nation’s wealth has been dealt with. The quantum of revenue generated from the resource has to be verified; whether the revenue has been properly accounted for by the government and the private licensee also needs to be ascertained. The principle behind the ruling is unexceptionable and gains resonance in the context of scams in spectrum and coal blocks allocations that were unearthed by the CAG. Politicians are not beyond colluding with private firms to extract rent from their control of public resources, and the latter have been happy to play along. The origins of the case that has led to the Supreme Court ruling lie in a dispute between a couple of telecom companies and the government over accounting of revenues, which is crucial to determining the licence fee payable to the government. The government suspected that the companies were accounting for revenues in a manner that would lower their fee liability.
The fact is that companies that use public resources have a responsibility to bear, and if they play true and fair they have nothing to fear from an audit, including one by the CAG. A CAG audit can be an irritant in the conduct of daily business as records need to be produced and queries answered, especially because this will be in addition to the statutory audit under the Companies Act. If governments and the CAG ensure that there is no harassment, there would be no cause to protest against the audit itself, as industry associations are now doing. After all, the ruling is a direct result of proven misdemeanour by some entities in recent times. That said, the challenge for the CAG will be in deploying adequate resources and talent in such audits when called upon by the government or the regulators. These need to be completed and the reports submitted in good time unlike traditional CAG audits of public sector entities that are invariably delayed. The government and the regulators should resort to CAG audits sparingly and only under exceptional circumstances where they suspect serious wrongdoing by a player. Turning to CAG audits routinely will only increase the regulatory burden and turn away private investors.