Auditing is, like all professions, a dynamic discipline and has become an indispensable tool for financial control to safeguard against fraud, extravagance and more importantly to add credibility and reliability. The need to provide users with appropriate information about the increasingly complex business and transactions have developed auditing standards and practice into rigorous, comprehensive and detailed practice. Audits provide third party assurance to various stakeholders that the subject matter is free from material misstatement. As a result of an audit, stakeholders may effectively evaluate and improve the effectiveness of risk management, control, and the governance process over the subject matter.
History of Audit in Nepal
In Nepal, audit institutions were in existence even before unification and these were later known as Kumari Chowk Adda to review government accounts and to strengthen the administrative system. For sound and effective functioning of government and to ascertain that the benefit of public funds being used, the Office of Auditor General (OAG) was established with the appointment of the first Auditor General as per the Constitution of the Kingdom of Nepal, 1958. Since then the OAG has been working to ensure clean practices in the working system of the administrative, financial and managerial system and to promote public accountability and transparency.
Then vs. Now
THEN: Audit under the Unitary System of Government
Government auditors play an important role in fostering trust and are referred to as the guardians of public trust. Under the previous constitutions, the OAG could audit transactions of various state organs, constitutional bodies and the offices under the central government. But the local bodies used to have their audits as per the provision under the Local Self-Governance Act-1999.
Previously, a village development committee was required to have audit conducted by an auditor approved by the District Development Committee (DDC) on the recommendation of the accounts committee constituted by the Village Council.
NOW: Audit under the Federal System of Government
Nepal as an inclusive federal democratic republic with the formation of 7 provinces requires even more effective public financial management and greater stimulus for more cost-effective outcomes of government spending. There are 753 local units across the country and the Constitution of Nepal, 2015 has authorized the OAG to audit the finances of these local units as well. The local bodies which used to have audits as provisioned by the Local Self-Governance Act-1999 are now mandated to have their audits conducted by the OAG, alongside offices under the federal and provincial governments, courts, parliaments, President’s Office, Vice President’s Office and the constitutional bodies.
The annual reports of the OAG provide details of the financial transactions of all government offices, state-owned organizations, boards, councils, and committees and also checks the status of compliance with laws related to financial disciplines and accountability along with recommendations to the government to adopt best practices.
Action Plan of Auditor General (2017 – 2023)
Table 1: Audit Figures for the period 1991/92 to 2015/16
The 55th Annual Report of the Auditor General presented in April, 2018 reported that most of the federal units are found to be far from compliance with standard accounting practices. The report has indicated the following as major issues faced at various levels of government:
A separate government agency, Financial Controller General Office (FCGO) under the Ministry of Finance oversees all government expenditure against budget, tracking revenue collection and other receipts and preparation of consolidated financial statements of the Government of Nepal (GoN). Despite the establishment of such an agency, the annual report of the OAG has listed above mentioned discrepancies showing lack of financial accountability in different levels of the government.
In public entities, the status of the internal control system has been found unsatisfactory, and the state of safeguard & utilization of resources and operation of revenue administration has also been found not very effective as expected. Internal controls are weak. Irregularities have started increasing. This fact can be justified from the following government entities’ comparative figures of audit and irregularity of past 3 years:
Irregularity amount in comparison to the audited amount, which figured at 4.67 percent in the 53rd report, has increased and stands at 6.86 percent in the 54th report. Likewise, if the status of irregularity settlement of past 4 years is to be analyzed, it is observed that irregularity figures have surged every year, but irregularity settlements figures through follow up audit have increased at a lesser rate as shown in the diagram. There has been a situation that similar audit observations are repeated every year, but attentions are not given to their improvements. There exists a situation that the regulating agencies are not functioning effectively and directives issued by the parliamentary committees have not been implemented. Hence, the financial accountability situation is found to be below the mark in entirety.
Hence, there is a crucial need for better performance and greater accountability in public financial management in Nepal. The transition from a unitary governance system to the federal system in Nepal demands more effective audit techniques for proper implementation of reforms and for scrutiny of legislation to avoid loopholes facilitating fraud and corruption. These issues must be addressed with proper rules and regulations for mobilization of public resources as well as actions must be taken against delinquents. The annual reports of the OAG should be taken into consideration and appropriate steps must be taken to address the problems mentioned in the reports. Proper documentation of every transaction, spending within budget limits, systematic monitoring of projects and their terms as well as conducting regular internal audits can remedy the instances of financial indiscipline to a great extent at all levels of the government.