Is CAG audit of telcos a good idea?

May 09 2014, 04:11 IST
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SummaryThe CAG audit of the telecom operators accounts is likely to open a Pandoras box of confusion if not handled carefully

A recent Supreme Court judgment on the subject of CAG audit requirement has raised many eyebrows. It is expected to have a far-reaching impact on investors who avail of government-auctioned natural resources, in general, and an immediate impact on telecom operators, in particular, in whose context the Supreme Court order permitting CAG audit has come.

The CAG initiated the audit after the Telecom Regulatory Authority of India (Trai) alleged that some operators were under-reporting the governments revenue share. In response to a petition by the operators, the Delhi High Court held that the CAGs constitutional powers are wide. Specifically in relation to the question of audit of telecom companies, it held that the CAG audit has to pertain to revenues and not all aspects such as wisdom and economy in expenditures, thereby restricting the scope of audit.

The Supreme Court, modifying the High Court order, held that it is not the statutory audit under the Companies Act or the special audit function as prescribed under the terms of the agreement between the licensor (the government via the Department of TelecommunicationsDoT) and the licensee (the operator), but an inherent power of the CAG as the constitutional authority under Article 149 of the Constitution which comes into play.

The Supreme Court, however, provided a caveat to its order by saying that the CAG examination should be confined to statement of accounts for ascertaining that there is no loss to the exchequer. In coming to the conclusion, the Supreme Court didnt agree with the operators association that the commencement of the CAG audit would depend on the formation of opinion by the government or DoT that the statement of accounts submitted by it (operators association) are inaccurate or misleading. The Supreme Court distinguished the power of the government derived from the licensing agreement and the power of the CAG as an independent constitutional authority.

To buttress its opinion, the Supreme Court relied upon established jurisprudence in the context of the importance of natural resources, in general, and the spectrum, in particular, as a scarce and finite resource belonging to the people of the country. The obiter sounded similar to the earlier judgments of the Supreme Court in the 2G spectrum allocation and Reliance natural gas matters.

A plain reading of the judgment reveals that it shall have a far-reaching impact and its consequences could be wide, encompassing all forms of natural resources such as minerals, hydrocarbons, etc, and

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