CAG’s Revised Directions Spark Fresh Questions on Accountability

Is the CAG empowering statutory auditors—or quietly stepping back?

By P. SESH KUMAR

NEW DELHI, June 1, 2025 – The CAG’s latest directive dated 23 May 2025 seeks to overhaul the audit landscape for public sector enterprises. Replacing the older directions issued in February 2021, this circular introduces a fresh layer of scrutiny for statutory auditors—particularly focusing on investment valuation, IT-enabled accounting systems, fund utilisation, risk management, and regulatory compliance.

The timing and tone of this revision suggest a deeper undercurrent. Statutory auditors have traditionally acted as the first line of review in Government companies, and their audit reports form the basis for the CAG’s supplementary audit under Section 143(6) of the Companies Act, 2013.

The CAG, as India’s supreme audit institution, retains constitutional responsibility for certifying the accounts of these companies. However, the revised directions appear to be outsourcing—not just oversight—but core audit judgments to statutory auditors, raising a fundamental question: is the CAG now assigning out what it is duty-bound to assert?

Earlier, the CAG’s directions under Section 143(5) mostly served as broad thematic guidelines, allowing room for the statutory auditors to conduct their audits within the framework of Indian Accounting Standards (Ind AS) and company-specific peculiarities. The older framework included review of Government grants, observation on internal controls, and financial propriety in line with standard audit practices.

It was a balance—enabling statutory auditors without disempowering the CAG’s own oversight.

But the new directions go significantly beyond. Now auditors are expected to assess the fair valuation of investments, including both quoted and unquoted instruments, and report on methodologies, compliance, and material deviations.

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They must examine the entire architecture of accounting systems, evaluate financial implications of off-system transactions, verify whether government funds have been utilised precisely as per sanctioned conditions, and even comment on risk management frameworks, data asset valuation, and alignment with global practices.

To top it off, the statutory auditors are now charged with verifying regulatory compliance across a staggering array of bodies—from SEBI and MCA to RBI, DPE, NPCI, CERT-IN, and more. Essentially, the auditors are being asked to function not just as financial examiners but also as compliance officers, IT auditors, risk analysts, and regulatory watchdogs.

The rationale appears to be the CAG’s intent to “modernise” the audit oversight of Government companies and bring statutory scrutiny in alignment with dynamic governance and risk landscapes. This is not without merit. CPSEs handle massive funds, and many operate in sectors like oil and gas, telecom, banking, and power, which are fraught with market, regulatory, and technological complexities.

Enhancing the audit scope of statutory auditors could plug accountability gaps and improve public financial management.

Yet, the deeper concern remains: if statutory auditors are now tasked with performing such a comprehensive role, what precisely is the supplementary audit by the CAG meant to do? If the initial audit already covers investment valuation, compliance, risk management, data governance, and financial integrity, is the CAG simply going to duplicate these efforts or is it a ploy to save its skin in the likely scenario of a fraud somewhere —or is it effectively backing away?

This question is not academic. The Constitution of India vests a unique and irreplaceable role in the CAG—to uphold transparency and accountability in public expenditure and to certify the integrity of the nation’s public accounts.

If the CAG’s own audit teams are now increasingly relying on outsourced statutory judgments without contest, without verification, and without institutional challenge, then the very principle of independent constitutional audit is in jeopardy.

The statutory auditors, while competent, operate under commercial frameworks and face practical constraints—client pressure, resource limits, and limited field visibility. Asking them to be the gatekeepers of every financial, regulatory, and IT-integrity aspect of a Government company effectively reduces the CAG’s role to that of a passive reviewer—simply endorsing the statutory audit reports and issuing token supplementary comments.

Hopefully, such auditors would be adequately compensated financially for the additional responsibilities they are now required to assume.

One cannot ignore the administrative motives either; this direction may well be a strategy to reduce operational burden on the CAG’s audit offices. But in doing so, it risks undermining the very legitimacy of the CAG’s constitutional duty.

This move also has institutional consequences. It erodes the distinction between public audit and private assurance. A statutory auditor audits a company. The CAG audits the Government. The former checks financial statements. The latter checks financial integrity. They are not interchangeable roles and blurring that line dilutes democratic accountability.

Indeed, this also raises a deeper and more troubling concern: is this elaborate delegation merely a veiled attempt or some sort of a disclaimer by the CAG to wriggle out of its primary statutory and constitutional responsibility to certify the annual accounts of CPSEs? By expanding the role of statutory auditors to such an exhaustive extent, the CAG appears to be outsourcing not only technical review but also judgment and institutional accountability.

While such directions may be projected as modernisation or operational efficiency, they run the risk of creating a perception—if not the reality—that the CAG is gradually disowning its core mandate. If that is not the intention, then the remedy lies not in washing its hands off the matter but in correspondingly strengthening its own supplementary audit mechanisms, reinforcing the depth and independence of its review, and asserting its irreplaceable constitutional role as the final certifying authority.

The public must never be left with the impression that the CAG is acting merely as a conduit for private audit reports or that the institution is stepping into the shadows when its scrutiny is most needed. Accountability outsourced is accountability weakened—and the CAG must resist that slippery slope with institutional resolve.

The CAG must clarify that these expanded directions to statutory auditors are aids—not substitutes—for constitutional audit. It must retain a strong supplementary audit function that re-examines high-risk areas, revalidates statutory judgments, applies sectoral insights, and holds management to account for decisions that go beyond mere financial propriety—such as public interest, efficiency, equity, and effectiveness.

Parliament, through its Public Accounts Committee and Committee on Public Undertakings, relies not on outsourced judgments but on the CAG’s sovereign audit voice.

If the new directions are to serve their intended purpose, they must be supplemented—not by withdrawal—but by institutional reinforcement. This includes:

• Training and equipping CAG audit teams to challenge, validate, and reinterpret statutory auditors’ work.
• Developing a risk-based supplementary audit strategy that prioritises sectors and schemes of national significance.
• Integrating forensic, IT, and environmental audit capacities into the supplementary audit framework.
• Periodically publishing assessments of how statutory audits align—or deviate—from public interest mandates.

Otherwise, we may soon find ourselves in a scenario where the CAG’s supplementary audit becomes merely a postman’s job, forwarding statutory reports to Parliament without any institutional stamp of insight, rigour, or challenge. And that would be a betrayal not just of a statute—but of the public trust the Constitution entrusts in the CAG.

(This is an opinion piece; views expressed solely belong to the author)

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