FINANCIAL MANAGEMENT

FINANCIAL ADMINISTRATION

DEFINITIONS:

1.1 (i) Public Finance: The term comprises two words public and finance. The word public is a collective noun and means a collection of people. As an adjective it implies belonging to the people. But recently this word has acquired a specialised sense. Now it is used in contradistinction to the word "private". The word 'finance' means money. It also signifies money matters and their management. Taken together the term means money matters pertaining to a state. The term 'Publric Finance' has been defined variously by various economists. A definition easier to understand is that of Lord Dalton, one time Chancellor of the Exchequer of the United Kingdom. He says that public finance is one of those subjects which lie on the border line between Economics and Politics and that it signifies the income and expenditure of public authorities and adjustment of one with the other. The term "Public Authorities", broadly speaking, includes Federal Government, Provincial Government, Autonomous organizations and Local Bodies.

(ii)Fiscal: ---Of Public Revenues: Financial; having to do with treasury or exchequer. The word is derived from the Latin word "fiscus" which means ‘purse'.

(iii)Exchequer: ---Treasury of a state or nation. The word is derived from old French "Exchequer Chessboard" because the accounts were kept on a table marked in squares.

PUBLIC FINANCE; WHY NEEDED

        1.2 One can ask why a state should need the finance. The answer is not very far to seek. As human-beings people have certain wants which they can satisfy themselves, such as eating, drinking and clothing, etc. But there are certain wants such as protection of life and property, construction of railways, roads, bridges and irrigation canals and establishment of hospitals, universities and ordnance factories, etc., which one cannot do in his individual capacity and has to look to the state for doing the needful. In order to perform this task, the state does require finance, and that is done by means of raising revenue and then incurring expenditure.

        1.3 The finance is a fundamental moulding factor in Public Administration. The public services have to be paid for and, since with few exceptions, they are paid for by the recipient of the specific service, the cost must e borne by the Community, usually through the method of taxation. From times immemorial the tax collector has been one of the most active and also the most ated of officials: While carrying out the orders of a despot, perhaps, his eputation could be termed as well deserved. But in the present democratic set-up, ven if the citizens' reactions have changed little, the position is very different.There may be still individuals who consider the state services as entirely non-productive, creating merely a charge that is to be paid out of the economic resources of private enterprise, but a moment's consideration of the many essential services that are now provided both by the state and the various other public authorities, would convince all, except the most partisan one, that public Administration does provide services for which the term "unproductive" will be  misnomer. Whatever views may be held on the subject it must be agreed that public Administration has to be paid for and that ultimately the size and quality of a service must rest upon the size and proportion of the resources that a community can afford to expend upon it. Problems of this nature relating to the national income and expenditure, methods of public accounting and principles of taxation fall within the sphere of the 'public finance'.

OPERATION OF PUBLIC FINANCE:

        1.4 The operation of public finance may be termed as involving a series of transfers of purchasing power. The purchasing power of certain individuals is transferred to "Public Authorities" by taxation and back again from these authorities to other individuals by way of public expenditure. Sometimes the transfer of purchasing power is not in cash, but in the form of goods and Services such as provision of uniforms, education and medical treatment, etc. As a result of these operations of public finance changes take place in the amount and in the nature of wealth which is produced and in the distribution of that among individuals and classes. The best system of public finance is one that secures the maximum social advantages greatest good of the greatest number from the operations which it conducts.

TESTS OF MAXIMUM SOCIAL ADVANTAGES:

        1.5 The primary requirement is the security of life and property. The, nation should be secure against internal disorders and external, attacks. Then comes the promotion of welfare of the people. They should be well-fed, properly clothed and housed. Facilities for health and education should be available to all and sundry. This can be achieved by increase in the production of wealth and its proper distribution. One way of doing it is to transfer wealth from those who have comparatively more to those who have comparatively less. This is done by increased taxation on the former and providing more amenities to the latter.

DIFFERENCE BETWEEN PUBLIC AND PRIVATE FINANCE:

        1.6 Broadly speaking, an individual's income determines the amount of his possible expenditure, but a public authority's proposed expenditure determines the amount of its anticipated income. In other words, while an individual adjusts expenditure to income, a public authority adjusts income to expenditure.If the expenditure of an individual increases he tries to increase his income by working extra hours or by cutting down the expenditure. In such circumstances a public authority would either scale down the expenditure by retrenching the establishment and staff or by giving up more ambitious development schemes. They may also make efforts to find out other avenues of income. In good times, while an individual spends his savings on luxuries or investments, a public authority would extend more amenities to the people. In the present times, however, when the development plans are under operation, the income always falls short of expenditure and the deficit has to be made up by encouraging savings, raising internal and external loans and by availing of the aids and grants offered by the friendly countries. The other alternative could be the deficit financing, but that leads to inflation and should, therefore, be the last resort.

PUBLIC INCOME:

        1.7 The income of a public authority includes all "incomings" and 'receipts'. Even public borrowings form part of public income. Professor Saligman, a noted writer on Public Finance, has classified public revenue into three broad categories, namely: -

(i) Gratuitous Revenue.

(ii) Contractual Revenue.

(iii) Compulsory Revenue.

(i) Gratuitous Revenue.Consists of gifts, donations and grants, etc., gratuitously made without any direct or indirect demand.They do not carry any obligation for goods and services to be paid in return. Such an income is neither very certain nor uniform.

(ii) Contractual Revenue.Comprises income derived from public property and industry. The state owns property in the form of lands and buildings. All rents received from such sources constitute 'Contractual Revenues'. The state may own industries such as railways, posts, telegraphs and irrigation canals, etc. The income received from these industries is also contractual revenue. Professor Saligman has called the contractual income as "Prices" also. This is because they resemble the prices charged by the producers for the goods and services they sell.

(iii) Compulsory Revenue. The income under this category is mainly derived by the use of penal and taxing powers of the state. The taxes are, by far, the most important source of revenues of a state. The 'Compulsory Revenue' is further subdivided into three heads Fees, Special Assessment and Taxes:

(a) Fees. A fee is a payment levied by the State in respect of services' performed for the benefit of the individuals. Court fee, registration fee and licence fee are examples of this kind of revenue.

(b) Special assessment. It is a payment made by the owners of property in respect of any improvement made to their property by the public authority. If a park is built, this goes to enhance the value of the properties in the locality and, therefore, the owners may be required to pay extra tax in the form of special assessment. Educational cess or any other kind of special cess may also be covered by this. Iqra tax comes under this category. Toll tax collected on highways and bridges is another example.

(c) Tax. This is a compulsory charge imposed by a public authority for the purpose of defraying expenses in accordance with the common interest of all. The taxes can be direct as well as indirect. Income- tax, corporation-tax and super-tax are direct taxes, whereas import duties, excise duties and sales tax are indirect taxes.

PUBLIC EXPENDITURE:

         1.8 The public expenditure may be broadly categorised as under:

(i) Maintenance and equipment of armed forces including police, (a) in peace and (b) in war;

(ii) Administration of Justice;

(iii) Maintenance of the ceremonial head of state and diplomatic representatives abroad;

(iv) Maintenance of the machinery of the civil government including ministries, legislature and civil servants;

(v) Public debt charges including payment of principal and interest;

(vi) Expenditure directly devoted in fostering industry and commerce; and

(vii) Social Welfare health, education, old-age pensions, famine relief and unemployment allowance, etc.

SCOPE OF FINANCIAL ADMINISTRATION:

1.9 The financial administration means the operations designed to make funds available to officials and to ensure their lawful and efficient use. The principal parties involved are:

(i)  the executive bodies, which need funds;

(ii)  the legislative bodies which alone can grant funds;

(iii) the executive offices that control the expenditure of funds; and

(iv) the auditing offices which determine the legality and propriety of the use of the funds.

In a small organization, the fiscal management is relatively simple but in big organizations like autonomous bodies, Provincial Governments and Federal Government, the set-up, procedures and problems are complex. The fiscal organizations deal with all the money aspects. The earning, saving, borrowing, spending and investing of monetary funds are parts of the fiscal management. It also consists of providing and utilizing the money, capital rights, credit and funds of any kind which are required in the operation of an organization.

1.10 The object, underlying the study of fiscal management, is that of the operating official or executive who is responsible for the execution and enforcement of legislation and who needs funds to employ the necessary personnel to purchase equipment and to incur other appropriate expenditure. The first task of operating official is, therefore, to secure funds. The second task is to use the funds in the performance of his agency operation. He must also maintain accounts to show the flow of funds and to indicate the results of the expenditure. Finally, the executive is required to submit the records for an independent audit to determine the legality and propriety of their actions. The most important aspect of fiscal management, as a part of Public Administration, concerns the relationship involved in the series of operations and not in the amount of revenue and expenditure in general or in particular. The emphasis is on the relationships rather than on the figures.

GENERAL CHARACTERISTICS OF FINANCIAL ADMINISTRATION:

        1.11 Financial administration has three broad objectives or responsibilities---Fiscal policy, accountability and management.

        1.12 Fiscal Policy: ----The Fiscal policy includes such matters as taxation theory, the incidence of specific taxes, the overall effect of taxation and public debt upon the economy, the deficit financing and probable force of unemployment. No other branch of the economics has undergone such revolutionary development in recent years as fiscal policy and theory. Although there have been many developments with reference to advance economies, yet no systematic and integrated theory of fiscal policy appropriate to an underdeveloped but developing economy has yet been formulated. This does not mean that problems of fiscal policy in under-developed economies have not been receiving the due attention. As a matter of fact many individual agencies have been applying their brains both at the theoretical and at the administrative levels. In a few words the fiscal policy may be defined as "a policy under which the government uses its expenditure and revenue programme to produce desirable effects and avoid undesirable effects on the national income, production and employment."

        1.13 In the days gone by the attitude of the economists had been to give little consideration to the impact of the government finance upon the entire economy. Their Primary concern had been to find new sources to meet ever-growing demand of expending agencies. The single objective pursued by them was increasing the revenues. They would not very much concern themselves with issues, which had an overall impact on incidence of taxation and their general repercussions. Instead of finding out who will ultimately be taxed and whether he can afford, the main question had been how to get more revenue with the least cost. This approach can be termed as pragmatic rather than objective. The correct approach would be that pragmatism must make room for planning. What is necessary is that more and more attention should be paid to the relation of government expenditure to the economy as a whole.

        1.14 The Objectives of fiscal policy are more or less the same in developed as in under-developed countries. In case of under-developed countries, however, the economic objectives of tax and budgetary policy are to promote investment, to maintain stability and to reduce extreme inequalities in wealth and income. These objectives are not basically different from the economic goals of allocative efficiency, economic growth, stability and optimum income distribution, which guide fiscal policy in, advanced countries on a free enterprise basis. The great importance of fiscal policy in many underdeveloped countries arises from the fact that there the state, under the democratic auspices, is called upon to play an active and important role in promoting economic development.For various reasons, especially the low ratio of savings to national income, the government of all under-developed countries virtually have been forced to play this role. In order to do this effectively they have to interfere in the economic life of the country, control and regulate economic activities and compel and induce people to behave in different ways. Another important reason, why public finance assumes importance in under-developed countries, is the capital accumulation which is the key problem. Efforts have to be made to achieve a higher ratio of savings to national income than that exists at present. In the Communist countries this has been achieved by keeping down the standard of living of the people, by dictatorial restriction of resources allocated for the production of consumer goods but this method is not open to the under-developed countries which have chosen the democratic way. The temper of the time simply will not tolerate great inequality of income and wealth. There is a clamour for higher and higher wages.It is difficult to resist this clamour as long as the rich are allowed to indulge in conspicuous consumption. The only way out of the dilemma seems to be to have recourse to public investment to a significant extent side by side with the private investment. Taxation could be used to ensure collective saving and at the same time to promote private investment. By this means the sacrifices involved in capital formation can be distributed more equitably and the poor sections assured that all classes are making sacrifices in potential consumption.

            1.15 Accountability. The question is who is accountable to whom and for what In matters of financial accountability both for money and property, such accountability applies not only to the officers of higher status but also to the rank and file. This problem' of accountability pervades all activities where funds and property are involved whether the institution is a small shop, a big store, a corporation or a government department. A store manager must see that his inventory conforms to the record of income and sale, a cashier must balance his cash, and a pharmacist must all time account for his supply of medicines.

        1.16 Accountability of Such a type is accomplished by a system of internal checks based upon record keeping. Thus when a store-keeper receives an order to issue a particular item of store, he makes an entry to that effect in the issue register and obtains the acknowledgement of the person concerned. Similarly if a cashier has to pay some money, he has to get an acknowledgment for it and to make necessary entries in the cash book. These entries are checked and rechecked by the Supervisors.

This procedure may seem quite elaborate to call for shortening the red-tape. But it should be remembered that unless there is a system of internal checks the correct amount cannot be vouch-saved. For this reason, in matters of financial transaction there is a tremendous amount of record keeping whether in private business houses or in Government Offices. Government environment, however, require and tolerate more record-keeping than private business houses. This is because Government departments are accountable to the public for the details of their operations and do not have the same degree of internal freedom as is enjoyed by private firms. The public business is every body's business, whereas the private business is concern of an individual or a group of individuals.

        1.17 The main reasons for the government to keep a large number of records may be explained like this:

                  (i) Many government records are required by law rather than the needs of management;

                  (ii) There may be more record-keeping for its own sake in government because of the stratification of hierarchy which in turn causes resistance to change;

                  (iii) There may be more record-keeping for its own sake in government record-keeping a. holy rite, because the rite has the sanction of time and was approved by the fore-fathers, only the profane would suggest abolition or alteration; and

                  (iv)A vested interest record-keeping may be easier to defend in government.

        1.18 What is the primary purpose of fiscal accountability, namely democratic responsibility to the public at large  A public official has two types of such accountability:

                  (i) fiduciary; and

                  (ii) accountability for the exercise of wisdom and judgment in making fiscal decision.

            Fiduciary refers to faith, trust and confidence. This is a quality expected of bankers, trustees and treasurers. The fiduciary accountability plays a very important role in those areas where custodianship predominates, the work of treasurers and cashiers, investment of trust funds and warehousing. Loss in these areas is fairly well-guarded by traditional bonding, auditing, record-keeping, reporting and regulation by law. The other type of accountability involves more discretion. It goes farther than custody and stewardship and enlists the dynamic policy determining quality of management. In other words, this kind of accountability asks whether the fiscal officers are 'good managers'.

        1.19 Management: ---One can presume that leaks are more likely to occur as a result of bad management. While the honesty of man is always a matter of concern, government costs are now more sensitive to management inaptitude than to defalcation. There can be no denying the fact that good management is the best antidote and preventive for dishonesty. The costs of government can be traced to overstaffing, incompetent personnel practices, poor motivation, unwise spending, poor accounting practices, and unimaginative leadership. The cure for these ills does not lie in the negative prescription backed up by a paralyzing division of authority. The proper treatment lies in dynamic and constructive administrative leadership and holding it responsible for stewardship.

        1.20 The greatest need in this whole area of accountability lies in the realm of standards. What are people to be held accountable for? The answer is obvious for doing a good job. But what constitutes a good job? The answer is not obvious at all because one does not know what is the proper standard of performance in the most activities.In the western countries they have developed certain standards for measuring the performance. In the United States, particularly, the emphasis is on 'performance budgeting'. But this is more effective for a big industrial house rather than in the government. The performance budgeting means budgeting units of work rather than things that are bought and paid for, such as papers and personal services etc. The theory is that the tax payer can hold the bureaucrat accountable when it is known that a given amount of money should buy X miles of a street sweeping or Y acres of soil conservation. The object is laudable but the question is whether Pakistan can adopt this practice in the present day conditions.

ORGANIZATION FOR FINANCIAL ADMINISTRATION:

        1.21 All administrative systems have much in common irrespective of size, historical evolution or cultural foundations. Among their universal aspects are machinery and procedures for collecting revenue, making appropriations, keeping accounts and auditing the records. Finance and administration cannot be divorced. Every administrative act has its financial implications, as inseparable as a man and his shadow. Nothing can be done without the expenditure of money at the very minimum for the compensation of the officials or employees who act. Finance is, therefore, one of the first and inescapable responsibilities of Government executives.

        1.22 To carry on fiscal operation a considerable organization is required, part of which lies within the major operating departments, part of which is outside consisting of budget officers, directors of finance, comptrollers, accountants and auditors. Organization for fiscal management is pervasive running all the way from top-management through middle management including line staff and auxiliary agencies. All top-management chief executives, departmental heads and their immediate assistants are involved. All middle management has to play its role since estimates and work programmes are dependent on each other.

        1.23 The present system of the fiscal management is based on checks and balances, in which control is divided among a number of public authorities. There are three ingredients in this control, first administrative control, secondly control by the National Assembly and thirdly control and audit by the Auditor-General of Pakistan. The centre of gravity is, however, the executive rather than the National Assembly though the latter has always the last word.

ADMINISTRATIVE CONTROL:

        1.24 The administrative control is exercised by the executive through the Ministry of Finance. The budget is prepared by the various administrative units, which is finally consolidated by the Ministry of Finance and then presented to the National Assembly. After the budget is passed, the execution thereof is the responsibility of the Ministry of Finance. It is concerned not only with the supervision of all aspects of the nation's finances, as its name would imply, but also with the economic planning in collaboration with the Planning and Economic Affairs Divisions. The control of the Ministry of Finance is an all pervasive characteristic of the public administrative system.

PARLIAMENTARY CONTROL

         1.25 The financial business of the National Assembly is divided into two distinct, but inter-weaving processes, that is authorizing the supply and the raising of necessary moneys. At the outset, a fundamental accounting arrangement may be mentioned which is a key influence in the operation of the government finance machine. This is the system under which the financial year, from July to June, is the standard accounting period and all authorizations of supply and payments apply specifically to that accounting period.
 This means that the unspent moneys have to be surrendered at the end of the financial year and excess payments, so as to be held valid, must receive specific authorization. Each financial year is treated as a self-contained period and authority has to be sought for every transaction to be included therein, whether or not it has already been previously approved. Financial provision begins with the making of policy which is inescapably conditioned by the resources in terms of finances and which the implementation of policy is likely to require. All proposals regarding income and expenditure have to be made to the National Assembly on behalf of the President. It is for the National Assembly to grant supply at the request of the President and. incidentally before doing so, to take the most of the opportunity to air the grievances.

INDEPENDENT CONTROL

         1.26. Independent control in the system of finance is embodied in the functions of the Auditor-General, an official appointed by the President. This control is exercised by him on the lines of the professional audit adopted by the outside business concerns.

         1.27 The above mentioned controls have been touched here very briefly. The subjects will be discussed at length later on.

TRENDS IN FISCAL ORGANIZATION:

         1.28 The administration in Pakistan is under-going profound and constructive change. The system inherited from the British was suited to a colonial administration but in no way it would cater for the needs of an independent and developing country. The changes, however, could not be introduced overnight. The evolutionary process which has been bringing about a transformation is not yet complete. The emphasis, on the exploitation of the natural resources for the benefit of the colonial rulers and maintenance of law and order, in those days, has now been shifted to a welfare state.

        1.29 The fiscal management at the time of independence was authoritarian and centralized. It did not meet the requirements of a democratic and developing country. So the present trend is towards decentralization and democratization of the management. One prevailing view is that the administrative management constituted the unitary process in which finances, personnel, planning and direction are blended together. Effective administration is not attained by compartmentalization and isolation of each management process. The ultimate aim is to secure a rational distribution of government income, one that has not been distorted by parochial tendencies, regional loyalties and power pressures. The underlying philosophy should tend strongly towards genuine democratic concept and practices.

         1.30 In order to achieve the objects mentioned above the greatest emphasis is on planning. All the development schemes have to be thoroughly planned well in advance. Not only that the expenditure to be incurred on the plans has to be correctly estimated but the resources from which the expenditure is likely to be met have also to be taken into consideration. For this purpose the Planning Commission was established. The Planning Commission prepared the First Five Year Plan which covered the period from 1955 to 1960 and so on. All types of development programmes covering the entire field of governmental and private activities' have to be covered by these plans. The Central and Provincial projects are drawn in the light of the targets fixed under these plans. So the planning is the sheet anchor of all fiscal activities of the Government.

         1.31 The second important change which was brought about in 1960 is regarding the preparation of budget. The preparation of budget is now a continuous process rather than being a seasonal activity as was the position upto 1960. Different schemes and projects are processed all the year round with reference to the targets fixed by the plan and are approved as soon as they mature.

         1.32 The third important change brought about in Pakistan is in respect of the decentralization. On the one hand the Provinces have been given more freedom in regard to the planning and execution of different development projects. On the other hand the Departments and Ministries have been given more financial freedom. Once the budget has been approved by the National Assembly, the Ministries are not required any longer, to go to the Ministry of Finance again and again for getting the expenditure sanction. The operational agencies enjoy more freedom of action and execution.

PUBLIC ACCOUNTS AND ACCOUNTING CONTROL:

        1.33 Accounting is the science of producing promptly and presenting clearly the facts relating to financial condition and operations that are required as a basis of management. The primary functions of a system of accounts are:

                  (i) to make a financial record;

                  (ii) to protect those handling funds;

                  (iii) to reveal the financial condition of the organization in all its branches or purposes at any time;

                  (iv) to facilitate necessary adjustments in rate of expenditure;

                  (v) to give information to those in responsible positions on the basis of which plans for future financial and operating programmes can rest; and

                  (vi) to aid in the making of an audit.

        1.34 From the point of view of the departmental head or the top executive, quick and accurate accounting reports are necessary in order to direct the course of work and future expenditure. They also provide top executive with the essential record to demonstrate the appropriate and legal use of funds making certain that each sub-division of an organization is actually using money for the purposes for which it was appropriated The accounts and supporting financial documents provide the evidence on die basis of which each spending officer justifies his expenditure, either to controlling authority or to the audit. While the accounting system is thus essential as a means of preventing the wrongful use of funds, it also underlies all other types of executive control of fiscal operations It is the basis on which executives act to prevent deficit, as well as the documentary foundation for questioning the care and wisdom with which funds have been used.

         1.35 Beyond these primarily fiscal purposes, the accounting reports are essential to management. In the business world the information currently disclosed by the accounting system is one of the main sources on which policy is predicted. In the Ministries and Divisions, the monthly, quarterly and annual accounting reports are now relied upon, as in business, for guidance as to executive policy and programme.

ACCOUNTABILITY AND AUDIT:

        1.36 Much of the business of any government is conducted away from the capital in field offices and establishments, army installations and civilian institutions. Some of the business of the Federal Government has always been carried on overseas. In any case, it is convenient and usually necessary to advance funds to disbursing officers to pay for current services, supplies and equipment. They are accountable for the funds they receive.

        1.37 Collection of the public revenue also occurs at many points mostly outside the capital city. Collectors of customs, taxation officers and other receivers of public money are scattered far and wide. They are accountable for the funds they collect. The general rule is that every official or employee receiving, collecting or using public money is accountable for its proper application. A Head of the Department is as accountable as a lower functionary. In modern times, the first accountability is to the employing agency by means already described, involving agency accounting and fiscal officers. The second and conclusive accountability is to an independent audit and National Assembly. Finally everyone is accountable to Almighty Allah.

        1.38 Fiscal accountability in simple terms means that a receiving officer must demonstrate that his collection was authorized by law, was correct, was supported by authenticating documents, and was deposited in full; all in accordance with statutory requirements. Similarly, a disbursing officer must demonstrate that the payments he made were authorized by law, authenticated by supporting documents, was correct and in strict accord with all formalities. The proof in each case must be completed, and must satisfy an independent auditing officer whose business it is to detect errors, irregularities or misrepresentations.

        1.39 Financial transaction must not only be correct in fact, but must be supported by proper documentary proof. For instance to determine the validity of a disbursement, an auditor will need to have evidence of the authority of the disbursing officer, the appropriation on the basis of which the disbursement was made and the effect of any relevant statutory language in the Appropriation Act, the receipt of the money by the proper person, proof that the service for which payment was made was actually performed, proof that the charge was not excessive, and presence of the signatures of the disbursing officer and such of his superiors as may be required. The auditor will also ascertain that funds were available in proper appropriation head, that all the papers were in order, that the arithmetical computations were correct, and that the claim was not a duplicate. To audit a complex transaction is a difficult operation requiring often knowledge of law precedents, and financial regulations and practice as well as the principles of accounting and auditing.

         1.40 The normal sequence of events, seen from the point of view of accountable officer, is this:

                  (i)  he receives and acknowledges an advance;

                  (ii) he disburses particular sums and takes receipts and other evidence of the transactions;

                  (iii) he submits periodically a statement of his transactions, with all the supporting documents to the auditor;

                  (iv) the auditor examines the documents, and if they are in order he settles the account, thus clearing the disbursing officer of any further responsibility;

(v)   if the auditor finds an error or is otherwise not satisfied he raises an objection and reports it to the disbursing officer;

(vi) the latter then furnishes any further explanation or justification, leading at times to extensive correspondence; 

(vii) if the auditor remains unsatisfied, the disbursing officer has in principle, only two resources: -

                        (a) to pay the disputed balance out of his personal funds; or

                        (b) to appeal to the higher authorities to regularise the transaction.

        1.41 The audit is designed to prevent embezzlement frauds, carelessness or innocent error. Embezzlement is now relatively rare, but the knowledge that an audit is to be made is doubtless still a necessary deterrent. Most controversies between executive and audit turn on different interpretations of law and misunderstanding of procedure, less commonly, on lack of supporting documents.

BASIC FUNCTIONS OF AUDIT:

        1.42 The audit is a function undertaken on behalf of the appropriating body, and is, therefore, a legislative, not an executive, task. It is part of the external control over administration maintained by the representative body not a part of the internal responsibility of official to the Principal Accounting Officer. In principle, it is unrelated to and independent of any means of fiscal control which executives may require to facilitate the overhead management and direction of work for which they are responsible.Its primary task is to enforce accountability by the independent examination of every financial transaction. In the words of the Comptroller General of the United States 'one of the important objectives of the audit is to fix the accountability of the officer of the Government for any illegal, improper or incorrect payments made resulting from any false, inaccurate, or misleading certifications made by them, as well as for any payment prohibited by Law or which did not represent a legal obligation under the appropriation or fund involved. At the same time an audit is a protection to responsible executives; a double check against malfeasance of subordinates, a shield against irresponsible charges, and an assurance to a new official taking over a going concern.

        1.43 Historically, an audit took place subsequent to expenditure. In its simplest form it was a scrutiny of books and supporting documents (payrolls, vouchers etc.) at the close of a fiscal year. The full year's operations were then available for study and criticism, surpluses or deficits were disclosed, and the net result of fiscal operations could be ascertained and reported to the appropriating body.The deterrent effect upon misuse of funds lay in the danger of ultimate discovery, not in prohibition at the moment. In its more highly developed form audit became a continuous operation, the flow of financial transactions through the auditor's office being uninterrupted throughout the fiscal year. It still remained, however, subsequent to the event. More recently the pre-audit was invented by which payroll, bills, and claims pass through the auditor's hands before payment. An audit is still usually, although not necessarily, an operation conducted after payments have been fully authorised and actually made.

         1.44 Much confusion has existed between the ancient function of audit and the modern function of administrative examination of accounts. An audit does not replace the operation involved in administrative control of expenditure, although the procedures are similar in part. The basic objectives of an audit are to see that:

                  (a) the funds have been used only for the purpose for which those were intended:

                  (b) the expenditure was in accordance with the conditions established by law;

                  (c) to check the accuracy of accounts and inventories;

                  (d) to ensure against embezzlement or loss of funds; and

                  (e) to report findings to the proper agency, i. e., the administrative agency, in case of unauthorized expenditure, the prosecuting officers, in case of wrong-doing and the legislative body in case of inefficiency or unsatisfactory operation of the fiscal system.

             The purpose of administrative examination of expenditure is to ensure care and good business judgement in the funds, as well as regularity and accuracy and more broadly to enable the top-executive to bring his influence to bear upon work programmes and administrative policy as reflected in expenditure. The end of an audit is to ensure legality and correctness of administrative control to avoid deficits, to supervise current expenditure, and to ensure that all fiscal programmes are in conformity with the master-plan of the Government. These objectives overlap in part, but not entirely.