ABSTRACT The paper is a study of the effectiveness of the traditional scope of duties of the Supreme Audit Institutions (SAIs) and the current expectations and wisdom expected of the SAI in view of the changing economic environment. The traditional role has been seen to be inadequate and it is envisaged by the paper that in order for it to be useful to the community, it has to take on a new role. The paper sets out the newer expectations of the SAI and covers 15 areas, namely accountability, transparency, corruption and fraud, performance auditing, evaluation of policies, audit of expenditure management systems, audit of privatization, evaluation of regulators, audit of public debt, environmental audits, leadership role in reforming government accounting, audit of social services and public administration, and lastly the framework for realizing Shariah goals through the SAI. 1. INTRODUCTION At a conference table where globalization, privatization, information technology and environmental issues are the main dishes, the subject of audit institutions may seem at best, a bit of a side plate. But as I shall show in this paper, the role of Supreme Audit Institutions (SAIs) is as vital as any other economic institution in shaping the Islamic economy in the 21St century, if not more so. But first I should clarify that the term “Supreme Audit Institution” is a generic name for the highest body in a country responsible for state auditing. Different countries call it by different names, such as Office of the Auditor General, Comptroller General, Comptroller and Auditor General, Court of Account, Court of Audit, Chamber of Control, etc. To avoid confusion, the generic term Supreme Audit Institution (SAI) is now used worldwide. Almost all Muslim countries now have some form of SAI. My main argument is that an Islamic economy in the 21st century would need a well-equipped Supreme Audit Institution to sustain itself. A large number of economic relations would need an independent system of oversight to be exercised by the SAI, failing which the economy may relapse to its pre-Islamic mode. If we survey the literature on Islamic resurgence produced during the last half of the 20th century, we see that the bulk of the literature pertains to Islam and economics. Yet, none of the Muslim countries were able to make significant progress in creating an Islamic economy in any true sense. It is not the purpose of this paper to offer reasons for this. But it is encouraging to note that there has never been a climate more favorable for an Islamic economic system than the present. A number of economic ideas that used to be voiced only by Islamic economists are gaining wider acceptance. For example, there is an increased emphasis on developing human resources, reducing corruption, fulfilling contracts, increasing the social responsibility of corporations, showing respect for the environment, reducing income disparities, preferring equity capital to debt capital, showing frugality in public expenditure, regulating the private sector, reducing trade barriers, limiting private property, minimizing the direct role of the state in the economy, etc. Islamic economists need not claim any credit for these developments. The economic thinking around the globe has evolved in these areas out of real-life imperatives. But Muslim thinkers and economists may rightly feel encouraged by this intellectual climate and should perceive it as a great opportunity to clarify the Islamic concepts in their proper perspective. Against this background, the subject of the conference is quite topical. Muslim thinkers need to develop a strategy for transforming existing Muslim societies according to Islamic norms and ethics. To this end, they must take into account the changes taking place in the world and how they are likely to affect Muslim societies. No society can transform itself in isolation from the rest of the world. It is, therefore, imperative to understand the shape that an Islamic economy will take under global pressures. Of course, each Muslim country will have to begin from where it is at the moment. This will be a limiting factor. But leaving that factor out for the moment, we need to outline the contours of an Islamic economy in the 21st century before we can proceed to define the role of a SAI in shaping it. 2. CONTOURS OF THE ISLAMIC ECONOMY IN THE 21ST CENTURY Neither the Qur’an nor Sunnah mention the term “Islamic economy”. In that sense it is a recent addition to the vocabulary of Islam. But we do come across a set of injunctions in the Qur’an and the Sunnah that deal with the economic aspects of human life. We do not intend to present here an academic definition of an Islamic economy. Suffice it to say that an Islamic economy could be an economy that implements those injunctions in the public sphere and makes it easier for individuals to practice them in their private lives. The injunctions dealing with economic life are quite few, leaving a wide scope for human legislation, independent reasoning and interpretation according to the needs of each epoch and region. Thus, there cannot be any one particular form of an Islamic economy. It will differ according to the circumstances. The Muslims of each epoch should discover the form of an Islamic economy suited to their needs. The only essential thing is the application of the basic injunctions with the intention of achieving objectives of the Shari’ah (maqasid al-Shari’ah). In public life, the objectives of the Shari’ah may be summarized as evolving a society in which the values of freedom, mutual trust, consultation, accountability, public welfare, public interest, transparency in public policy, the rule of law, and elimination of injustice, corruption and fraud (zulm and fasad fi’al-ard) are supreme. In private life, the Shari’ah prescribes simplicity, moderation, contentment, compassion, fraternity, and generosity. These norms and values provide a general framework for the Islamic economy. But people in each age are free to translate them into appropriate policies and institutions. That does not mean that everyone in an Islamic economy be imbued with these values. These are, of course, the ideals that the Islamic economy seeks to realize. In describing the contours of an Islamic economy, Islamic economists have often edged more toward idealism than realism. They have made all sorts of assumptions about the faith, honesty, integrity, love, piety, fraternity and prudence of the citizens of an Islamic state, knowing fully well that this is a world of mortals and that, too often, These assumptions may be no more than pious hopes. Naturally, there has been much severe but justified criticism of these assumptions. However, even if we discount these assumptions and conceive of an Islamic economy realistically in the present day, there must be some distinctive features that make it Islamic. Otherwise, it does not make much sense to discuss the concept of an Islamic economy. It is not the intention of this paper to repeat from the literature in which the contours of an Islamic economy have been amply described. Suffice it to say that in the 2lst century, if any country ventures to transform its economy according to the Islamic faith, it will have to introduce at least the following changes: • Abolish interest from all kinds of financial transactions.
• Introduce a system of zakat and cushr. Supplement the system with an appropriate social security system for reducing income disparities, which have emerged due to non-operation of the system of zakat over centuries.
• Implement the Islamic laws of property and inheritance.
• Introduce suitable land reforms by limiting the size of present landholdings and streamlining the tenancy system.
• Develop a legal framework for regulating markets.
• Create institutions for regulating public and private sector monopolies and for regulating business corporations providing social and public goods and services.
• Enact necessary laws and create institutions to protect the environment.
• Introduce a system of al-hishah (accountability) and a legal framework for protecting the consumers’ interest.
• Adopt suitable monetary and fiscal policies to stabilize prices.
• Create a civil society that puts pressure on public functionaries to adhere to the norms of Islamic ethics and public welfare.
This is bare gist of what the literature on Islamic economics repeats endlessly. So we can safely infer that there is a broad consensus on these features of the Islamic economy. But the literature hardly discusses the mechanism to sustain such an economy. Even if we are able to create an economy we shall not be able to sustain it for long in the absence of an effective SAI. 3. NEED FOR AN ISLAMIC SAI Why do we need an SAI of the type visualized in this paper for an Islamic economy in the 21st century? Can an Islamic economy do without such an SAI? The Islamic economy in the 2lst century would face several imperatives. It will have to remain economically viable and efficient. It will need to be competitive in a highly dynamic environment, It would not be possible for an Islamic economy to operate at a sub-optimal level and still maintain its sovereignty. It would need to show a high level of intolerance for corruption, waste, bad governance, pollution bureaucratic delays. These imperatives will confront the Islamic economy as they do other economies of the world. The Islamic economy would, therefore, need to create institutions and systems which propel it into a fast-track high-efficiency mechanism. It would need to ensure that it does not lose sight global imperatives. The SAI is a natural institution for securing such assurances. If the Islamic economy does not assign this role to the SAI, it will have to create some other institution with a similar mandate.
The Islamic economy in the 2lst century would require an effective and dynamic SAI to support the state in performing the following functions:
• A system of planning, monitoring and evaluating changes.
• A mechanism to measure performance of the government, corporations, local bodies and Non-Government Organization’s (NGOs) involved in the process of change.
• An early warning system and an effective mechanism to fight against fraud, corruption and abuse of resources.
• An independent evaluation of the regulatory agencies for assessing the extent to which they have achieved the objective of public welfare.
• A strong mechanism to ensure that all parties to various contracts adhere to their commitments.
• A system for measuring and reporting reduction in income disparities and the state of the human development index.
• An independent review of the macroeconomic stability and solvency of the economy.
• An evaluation of environmental policies and programs of the government and role of the private sector. 4. TRADITIONAL ROLE OF SUPREME AUDIT INSTITUTIONS Most of the supreme audit institutions that we find in the modern world developed in the 20th century, yet some form of state audit has existed since ancient times. For example, Vassilios P. Filios asserts that there is evidence of auditing as far back as 300 BC in Nineveh. Similarly, there are some references to auditing of accounts in the Bible.1 Although very little has been documented in the history of state auditing, Muslims were pioneers in developing this institution and it is worth a little digression to mention a few of the milestones in this development. The concept of accountability of rulers can be traced back to the traditions of the Prophet Muhammad (SAW) where he clearly distinguished between private property and public property. He would often ask his officers and revenue collectors to account for their income and expenditure. The first four caliphs further elaborated this tradition and demanded detailed accounts from their governors and revenue collectors. These accounts were presented in public and the governors or revenue collectors were put to a strict scrutiny. Subsequently, the Ummayyads and the Abbasids evolved the concept of Diwan. They had a large bureaucracy dealing with different departments, of which the Bayt al-Mal, Diwan al-Kharaj and Diwan al-Nafaqat were mainly concerned with financial matters. These had subordinate offices dealing with the upkeep of accounts, each one of which was known as Diwăn al-Hisăb. There was a entra1 agency known as Diwăn al-Adhimmah which was responsible for independent audit of the accounts prepared by the Diwăn al-Hisăb on the basis of data supplied by other departments. In certain regimes, the executive departments had attached to them Diwan al-Adhimmah, (much like the internal audit of today) and the supreme audit institution was known as Diwăn Daman al-Adhimmah. The system was quite elaborate and government officials often had a tough time getting a clearance from the audit office. The principal accounting officer in each case used to be the head of an executive department. These were days when the pristine concept of caliphate had been replaced by monarchy. The monarchs often enjoyed unlimited access to the finances. Despite all this, however, the audit had an effective role as far as the jurisdiction of the government officials was concerned.2 With the decline of the Muslims, these institutions also fell. There is a missing link in the present history of auditing which starts abruptly with an account of auditing in Europe during the medieval ages. The king as supreme ruler was not answerable to anyone as all state money was considered his private property. Government auditing is primarily linked with the concept of control over expenditure. It evolved in its present form largely as a result of the struggle for power between the parliament and the executive branches of government. With the decline of feudalism, the public pressure on kings and princes mounted and they felt obliged to consult taxpayers before levying taxes. In England, the Magna Carta (1215), issued by King John under threat of civil war, was recognized by succeeding generations as a milestone in the process leading to public sovereignty. It obliged the king to consult the “common council of realm” for any taxation, but he still enjoyed sovereign power over the revenues raised. Public control of state expenditure was still far away. The struggle to obtain parliamentary control over expenditure lasted for centuries. It culminated in the 1688 Revolution and the Bill of Rights in England. But even then Parliament won control of expenditure only to the extent that all appropriations from state revenues had to be for specific purposes. Later, the 1789 Revolution in France led to the abolition of the monarchy and nobility, and the legislative assembly assumed full control of state expenditure. These developments had far reaching effects in other parts of the world. For example, it enabled the Congress to assert its authority on expenditure and revenue in the United States. The institution of government auditing evolved alongside these developments. The legislature needed an independent examination of the accounts and operations of the executive to ascertain that it remained within the authorized limits. Thus government auditing evolved as an arm of the legislature. But it was not until 1866 that, in England, for the first time, an audit office was set up to audit the accounts of the government against the budgetary provisions. The Auditor-General was given some independence. He was appointed by the executive but once appointed could be removed only by the Parliament. The Parliament would authorize the executive to collect taxes and to spend money. The Auditor-General was authorized to audit the accounts and report back to the Parliament on the executive’s performance in collecting and spending the money.3 With the evolution of democracy, auditing was recognized as essential to the proper functioning of government. The colonial powers introduced the institution in its present form to the countries they ruled. At independence, these countries inherited the institution, its traditional role and basic framework.
The main features of the traditional role of a supreme audit institution have been as follows:
• Conducting a financial audit of government receipts and payments and reporting, within the narrow framework of arithmetical accuracy, adherence to rules and procedures and propriety of actions and omissions.
• Reporting to the legislature (or to the head of state, where democratic traditions do not exist) on compliance with budgetary allocations.
• Some supreme audit institutions also report on the state of internal controls in the government. 5. INADEQUACY OF THE TRADITIONAL ROLE OF SAIs The SAIs focused on compliance with rules and procedures and completeness of paperwork It is easy to show that an organization can comply with all rules and regulations without adding any value or achieving the objective for which it has spent state resources. The accountability of the state functionaries is thus checked only to the extent of their adherence to rules and procedures. In its traditional role, the SAI makes no contribution to assessing the achievement of objectives. This inadequacy is true of the SAI’s role in a traditional capitalist democratic society. In an Islamic society with a very heavy social and ethical agenda, the traditional role becomes still more inadequate. This explains in part why Muslim economists have not paid much attention to this institution. There are at least two very important reasons why the traditional role of SAIs must change. First, there is a growing realization all over the world that SAIs should report on the performance of the executive departments and agencies in the broader framework of economy, efficiency and effectiveness. This approach, differently named in different countries, is most commonly referred to as performance auditing. It is not possible for any future Islamic society to evade this enhanced role of the SAIs because of the great value it can add to the management of resources and its vast potential for streamlining decision-making in the government. Second, the imperatives of the 21st century are myriad: the state must strive for an egalitarian society; have a sustainable mechanism to protect public interest; play an active role in creating a civil society and demonstrate the ability to establish systems of good governance. These imperatives will make it impossible for governments to ignore a changed and expanded role for the SAIs.5 It seems, therefore, that the Islamic economy in the 2lst century will have to assign an expanded role to the supreme audit institution. For this purpose necessary legislation will have to be put in place, bearing in mind the following essentials:
• The SAI should be truly and completely independent of the executive branch of the state.
• The SAI should have the freedom to decide its action plan and scope of work.
• The SAI should have its budget approved by the legislature and should be accountable to it. In countries where no democratic institutions exist, the SAT should be accountable to the highest ruling authority in the country and not to the lower executive authorities.
• The SAI should have a clear authority to undertake performance audits and evaluations of the executive functions and policies. This is necessary to provide the legitimacy to audit institutions for an expanded role in the coming millennium. 6.EXPANDED ROLE OF THE SAI In this section I shall discuss the expanded role of SAI in the 21st century and show how it will help in shaping the Islamic economy. 6.1 ACCOUNTABILITY Accountability refers to the rendering of account by those responsible for managing particular resources. In democratic countries, it refers to a system wherein the legislature authorizes the executive, through a formal budget, to collect and spend resources. The executive departments carry out their programs and compile accounts. The SAI conducts audit of these accounts and reports back to the legislature about the truth and fairness of these accounts. This is the traditional concept of accountability. But in recent years, this concept has undergone a change. It is no longer considered sufficient for the government departments to render accounts of their financial transactions. They are also required to inform the legislature about the achievement of physical targets. To this end, the format of budgets and accounts is undergoing a change. Increasingly, the budgets are incorporating physical targets with time schedules and quality of delivery for various services and programs. The emerging concept of accountability makes public servants responsible for program results and achievement of objectives. Although this concept takes the traditional concept of accountability a step further, it leaves the precise role of an individual vis-á vis the organization ambiguous. It is still not clear what the responsibility of an individual is if he violates an ethical rule in order to promote the interest of his organization. The prevalent and emerging concepts of accountability fall short of the Islamic concept of accountability. In the Islamic framework, each individual is responsible for his acts or omission. An individual working for an organization is nevertheless bound by a general and broad ethical framework, to which he must adhere and within which he must perform his duties. Thus if he commits an unethical act in order to promote the interest of the organization, the Islamic framework does not excuse him on the grounds that he did not derive any personal benefit from that act. For example, if someone bribes a government official to get a contract for his organization but does not derive any personal benefit for himself from doing so, he still remains personally liable for it. He is not exempted because he acted on behalf of his organization. The role of SAIs attuned to the Islamic concept of accountability accordingly expands. The SAI of an Islamic economy will conduct audits within the overall ethical framework of Islam. For this purpose, the delegation of powers, the roles and functions of each individual in an organization, will have to be clearly defined so that ultimate values of justice and fairness remain intact. 6.2 TRANSPARENCY The Islamic economy in the 2lst century will have to uphold the value of transparency in its operations. The early Islamic state under the Prophet Muhammad (SAW) and the first four caliphs conducted its affairs in the most transparent manner. Most of the decision-making was done in the mosque. Public funds were brought to the mosque and distributed in public. The life style of the rulers were both very simple and visible so that any indication of prodigality would become transparent immediately. As the Islamic state became a monarchy, the rulers began to keep the affairs of the state secret from the general public. For centuries, the rulers, Muslims and non-Muslims alike, have enjoyed the benefits of such secrecy by keeping state matters away from public scrutiny. With the advent of democracy, the demand for information on government policies and decisions became the prerogative of the representative parliaments. But despite this, the governments have been successful in hiding important information from the public representatives by various devices. For example, government budgets, reports and accounts are usually published in such a manner that a non-technical person cannot make much sense of them, indeed even technical experts find a large amount of the information as presented highly complex. This situation is now changing rapidly; in the 21st century, governments will be required to disclose more information on their operations. The SAIs can play an effective role in ensuring that this increased information provided is adequate, true and fair. The focus of the examination by the SAI will be as follows: • In areas of fiscal administration, the SAI can report if the government has disclosed all the necessary information and documentation so that any rent seeking by individuals or corporate bodies becomes transparent.
• The SAI can report so as to make the relationship between the government and the corporate sector transparent. In some cases, the corporate sector may be undertaking some activities that normally should be done by the government or vice versa. For example, Sui Southern Pipeline Company in Pakistan financed the construction of a sports stadium in the province of Sindh on the verbal orders of the then Prime Minister. Similarly, the Capital Development Authority in Pakistan built a polo playing field in the Prime Minister’s residence. These activities came to public notice following the reports of the Auditor-General.
• The SAI can report on the fiscal costs and terms of assistance to private sector firms. These favors to the private sector may take many different forms: multiple exchange rates, exchange rate guarantees, import deposits, preferential credits, and loan guarantees. We can quote a concrete example from Pakistan. In case of a private power producer, HUBCO, the government provided undisclosed and undue benefits to the company worth billions of dollars. The Auditor-Genera! reported these irregularities in his report to the parliament.
• The SAI can report on utilization of extra-budgetary funds. Many governments create funds for specific purposes, some of them quite legitimate, but do not present them to the legislature for necessary authorization. For example, in Pakistan, the government submits a one-line budget relating to defense expenditure. Similarly, it is selling its assets through privatization but the proceeds are kept out of the main books of account. Another example is the iqra surcharge, which is levied on all imports in order to provide resources to the education sector. But there is no public information on the utilization of these funds. Even part of the zakăt funds are being kept in the form of a reserve and then borrowed by the government without any authorization form the legislature. Although these funds are meant to meet specific needs, in the absence of any system of oversight, governments often use them for other purposes. These other purposes may also be quite legitimate, but there should be a system to make this transparent. The SAI can usefully play the role of scrutinizing the management of extra-budgetary funds by the government.
• The SAI can undertake audit of tax expenditures. These are tax preferences viewed as budgetary outlays benefiting certain households, enterprises, sectors or activities. They are in fact subsidies and have implications for income and wealth distribution. The SAI reports can analyze the effect of tax expenditures on income distribution patterns since in an Islamic economy, reducing income disparities is a major policy objective. 6.3 CORRUPTION AND FRAUD There has been an upsurge in literature on corruption recently, as if the world had suddenly realized that corruption is rampant in developed as well as in developing countries. Except for the USA, most of the other advanced countries give tax breaks to their corporations for any bribes they have paid to secure international contracts. This shows the degree of tolerance for corruption. A survey of 3600 firms in 69 countries reported in the 1997 World Development Report provides evidence of widespread corruption. According this survey, 40 percent of the entrepreneurs reported having paid bribes to get things done.6 One of the very highest priorities of any Islamic economy is to uproot corruption and fraud. It is regrettable that some of the Islamic countries at present score very high in dishonesty and fraud. Although corruption and fraud are very complex issues and a multi-pronged effort is necessary to tackle them, the SM can play an effective role in minimizing these menaces. • The SAI can report on situations of potential conflict of interest. One of the sources of corruption is the absence or ineffective implementation of necessary laws against these situations. Examples include doctors diverting patients from hospitals to their private clinics, or where private patients are being treated in hospitals using official equipment and resources. Also, government employees are allowed to undertake consultancy work while remaining on the job. The SAIs can draw the attention of the legislature to such situations of conflict of interest. • A large number of Muslim countries are developing economies dependent on foreign loans. Without getting into the debate of the contribution of foreign aid to development, a general observation is that it has provided ample opportunities for corruption and fraud among the recipients. The foreign loans come as easy money and the end-users squander it ruthlessly to the disadvantage of the already poor and disadvantaged of these countries. An ideal Islamic economy may well not contract this sort of foreign debt. But since it may be a very long time before the Muslim economies can really reach this stage, uprooting corruption and fraud from foreign aid must be a high priority. The SAI can help in achieving this objective. Another example from Pakistan can be cited. The donors for the Social Action Program, a multi-billion dollar project for alleviating poverty and uplifting the rural areas, noted with concern that the funds were being misused in several ways. First, there were ghost employees: teachers, doctors, para-medical staff and sanitary workers, who existed only on paper. Second, recruitment to schools and health centers was not on the basis of merit: there were reported cases of illiterate persons being recruited as teachers through political influence. Third, the procurement of drugs, equipment and services was non-competitive, expensive and sub-standard. Fourth, the sites selected for building schools and health facilities were inappropriate. Influential people were able to sell their useless land consisting of ditches and marshes as sites for building schools so far away from populated areas that they could not be used. Thus, the public functionaries distributed the bulk of the foreign aid among themselves. The Auditor-General of Pakistan took up the task of Third Party Validation of this program in 1998. As a result, a lot of pressure has built up on the executive departments to restrain corruption. There are other examples also. In Korea, the SAI carries out preventive auditing to check the physical progress of all works and vouch for their quality so that any misuse of resources can be prevented before it takes place. Based on these experiences, we can say that, given a mandate to do so, the SAIs can play an effective role in fighting corruption and fraud in the government. • The government has a fiduciary relationship with its people. It manages a large number of public funds of its citizens purely on a trust basis. But recently, examples have come to notice where irresponsible governments misuse the trust funds surreptitiously and betray the people’s trust. One glaring example is the freezing of foreign currency accounts of Pakistani citizens by the Government of Pakistan on 29 May 1998. These accounts held deposits worth $11.63 billions. Successive governments had been using these funds without authority or propriety for extravagances. No one had known about this government fraud. The SAI could protect the interest of the people by reporting on cash management by the government. However, we may wish and hope that the government in an Islamic economy will not commit such fraud, the experience of human history shows that there is little excuse for being naively idealistic and unprepared. • There is a growing public awareness against corruption and fraud in the government. The media has played an active role in enabling such awareness. Among prominent examples are the Watergate scandal in the USA, the Bofors scandal in India, and the Surrey Palace scandal in Pakistan. The SAI can take a lead from media stories and conduct more thorough, independent and objective investigations into allegations. The reports of the SAI will provide a more reliable basis for action and policy formulation. • The SAIs can report on the governments’ system of monitoring the implementation of anti-corruption laws and their impact in obtaining value for money from public funds. The SAIs can evaluate the efficiency and effectiveness of anti-corruption agencies and possible avenues of corruption in those agencies.
• The SAIs can review the ways in which corruption is practiced and suggest preventive measures; similarly, they can indicate loopholes and administrative improvements that will close them. 6.4 PERFORMANCE AUDITING The global economy is a scene of intense struggle and ruthless competition. With the weakening of international borders, no country will be left ‘in peace’ to enjoy its inefficiency. International competition will soon compel the slow- runners to catch-up or to be eliminated. As a result, economies will have to be vigilant about efficiency. Performance auditing, a recent addition to the scope of auditing is one technique that can help economies remain efficient. Traditional auditing focused on the accuracy and fairness of financial records and final accounts. It examined the internal controls and expressed an opinion on whether the financial statement was a fair and accurate representation of the affairs of the audited body. In the domain of government auditing, the traditional approach also examined compliance with rules and regulations and propriety of financial decisions. This approach remained in vogue until the 1970s when the legislatures in some of the advanced industrial countries began to ask the then “awkward” question: Have we received value for money The SAIs of these countries did not have a ready answer. But it compelled them to do some hard thinking As a result, the discipline of performance auditing was born. Performance auditing focuses on the economy in procurement of goods and service, efficiency in the use of resources and effectiveness in achieving the end-results. The objective of performance auditing is to see that resources are well managed and that those who are responsible for certain results should also be accountable for their actions and omissions. Gradually, its techniques and approach have evolved and there is now a generally agreed framework for this type of auditing. Performance auditing is variously termed in different countries, but performance auditing remains the most popular. Whatever the name, the focus remains on the three ‘E’s, i.e., economy, efficiency and effectiveness. Interestingly, in this field, the SAIs have been in the forefront. The private sector auditors are still trying to grapple with the framework of performance auditing. We think, in the 21st century, Islamic countries will need to practice performance auditing on a large scale. This is because of the economic Imperatives for getting ahead in the global economy In any case, from the Islamic perspective, performance auditing seems to recommend itself. The values of frugality, moderation, and ethics dominate both in performance auditing and the Islamic approach to economic matters. Similarly, the command to conserve resources and avoid waste, a hallmark of performance auditing, constitutes an important Islamic norm. We think the SAIs of Islamic countries should adopt performance auditing as a going concern. This will introduce a culture in the society where public managers are accountable for the responsibility entrusted to them, and are expected to exercise their judgement with due regard for economy, efficiency and effectiveness. • Although performance auditing is still not very popular in the private sector, we think that for an Islamic economy it has important applications. Islamic banks, which handle public funds as a trust and also as business partners, must be subjected to performance auditing. An Islamic economy will need to install this system of auditing to assure the public that the managers of their funds are acting prudently and ethically. The public will need to know through performance auditing of banks that the profit or loss that they are sharing with them is in fact the profit that could be earned and that their funds have not been subjected to imprudent investment decisions. Also, they will want to be satisfied that the cost of bank operations charged to profit was legitimate a true. • There is another important application of performance auditing in an Islamic economy. The entrepreneurs who will take funds from the Islamic banks will have to share the profit or loss with the banks. The banks will need to know that the entrepreneurs took all the decisions with due regard for economy and efficiency, and that the investments proved to be effective. They will want to be satisfied that the entrepreneurs’ books show a true profit or loss. In the absence of performance auditing, there is no way that the banks can get such an assurance. In fact, performance auditing will be the mainstay of an Islamic economy in the 21 century. • Governments introduce various policies and programs with the avowed objective of ‘reform’. Privatization, contracting-out and engaging NGOs in delivery of various services are some examples. However, in most cases they do not look to see if the ‘reforms’ have been successful. The SAIs can report on the effectiveness of government reforms. • In the coming century, new public administration concepts will oblige governments to adopt more client-based policies. This will include such programs as complaint-handling mechanisms, convenient timing for various services, availability of information on the internet and other media, timeliness of various services, etc. This is all more so in an Islamic economy where the government is supposed to be the ‘servant’ of the people and not their ‘ruler’. The conduct of the first four caliphs of Islam is ample evidence of this norm. The SAIs can report on the success of governments in achieving the objective of better client service. 6.5 EVALUATION OF POLICIES Present day thinking in state auditing is somewhat shy of saying that the SAI should audit government policies. It is generally felt that the policies are the domain of the executive and auditors should not question them. The furthest an auditor may go is to see if the government employed a reasonable strategy for implementing a policy, without ever asking if the policy itself was appropriate. We think that in the near future this is going to change. The frontiers of public auditing will be extended further. Citizens will want to know if a particular policy, as well as being economical, efficient and effective, was desirable from the broader social and ethical perspective. For example, the government may launch a program for modernizing an airport or imparting certain skills to a certain class of people. The citizens may ask: why were these policies adopted while certain (to their mind) more pressing needs were denied attention? At present there is hardly any systematic arrangement for evaluation of policies, except for media reports and protests by citizens through newspapers and TV debates. These protests and reports may not be an objective and systematic assessment of the policies. The difference between performance auditing and policy evaluation will be that the former uses the criteria of economy, efficiency and effectiveness while the latter uses the broader criteria of social equity, fairness and justice. The former concentrates on the performance of various policies while the latter on the very legitimacy of those policies. Since these values are a very high priority in an Islamic economy, SAIs would be expected to evaluate policies in this broader framework. 6.6 AUDIT OF EXPENDITURE MANAGEMENT SYSTEM Time will impose additional imperatives on the Islamic economy as public awareness of the Shari’ah increases. The traditional system of expenditure management does not go beyond allocating budgets on an incremental basis. The finance ministries look at the expenditure of the previous year and add a small percentage for the coming year. Budgeting and expenditure control does not follow any detailed analytical framework. There is growing realization that this pattern of public financial management is inadequate and non-responsive to the needs of the people Management of budgets will have to adapt to the changed expectations:
• There should be clear descriptions of the physical outcomes from the budget allocation Already some countries have adopted varied types of performance budgeting This is going to be the order of the day in the near future.
• The budget should aim at macroeconomic stabilization
• The budget should aim at inter-generation equity
• The taxpayer should have some choices with regard to the services to be provided by the government. It means, the local populace should be consulted in conceiving various schemes and projects.
• Public agencies should aim at providing various services at specified rates, time and quality.
• The cost of financial controls should be minimal. (It means greater empowerment of the executing agencies within a tight accountability framework.)
The SAIs will be expected to affirm whether these objectives of financial management are being met. The SAI can adopt various assumptions of the budget as its criteria and report back to the legislature if these assumptions were met fairly. 6.7 AUDIT OF PRIVATIZATION Privatization is the current rage in all countries of the world and, in all probability, will continue to be so for some time. There is no specific Islamic position on privatization. But to the extent that public interest must be protected, an Islamic economy must have systems in place to ensure that privatization adds value to the society. The SAI can play an effective role in this field. For example:
• It can report on the costs borne by the government in restructuring public enterprises or financial institutions before they are privatized. This information can be of immense value in evaluating the prudence of the decisions made.
• The SAI can report on whether the timing of a privatization was in the best public interest. There are genuine pressures on government to privatize certain assets and facilities so as to, for example, meet a fiscal deficit or redeem public debt But such pressures should not be an excuse to harm public interest The SAI could examine if key stages prior to privatization (such as selection of external advisers, putting the business into appropriate legal form, decision on the method of sale, preparation of financial information, identifying and valuing the assets, valuing the business, marketing, and negotiating the sale) were observed If the government omitted some of these key stages, the SAT could analyze their consequence for public interest.7
• The SAI can examine whether adequate safeguards were in place to ensure that the sale was properly and honestly carried out. It can investigate any allegations of improper practice, and establish whether there were any lapses in the procedures.8
• The SAI can ascertain that the management and employees of the state business subject to sale acted at all times competently and in a manner which supported the integrity of the sale process effectively and served the best interests of the public.9
• The SAI can report whether the government provided equal information to all the bidders so that the Islamic criteria of fairplay and justice were observed. Similarly, the SAI can report whether the government applied the criteria for evaluating bids fairly and objectively so that no one party had an undue advantage or disadvantage.10
• The experience of Russia demonstrates that if privatization is not coupled with competitive markets, it can lead to higher prices, not lower, and less economic efficiency, not more. The SAIs can report on government policies that promote monopolies and discourage competition. 6.8 EVALUATION OF REGULATORS In the wake of privatization has come the realization that a strong regulatory framework is essential for protecting the interest of consumers. Privatization does not mean absence of government, even though it does minimize the economic role of government. It means, perhaps, a strong government, with adequate regulatory powers. The government should establish regulatory bodies in all sectors where privatization is being undertaken. These regulatory bodies should be independent, competent, and transparent. They should have clear goals and adequate authority to enforce regulation. The regulatory framework should protect consumers from exploitation, promote efficiency, guard against cross-subsidization and discrimination among competitors. It should provide a level playing field for all players. Investors should be encouraged and not deterred by the presence of the regulators. The Islamic economy, which has a very high commitment toward maslahah, cannot remain oblivious of this duty. The essence of market mechanism in the Islamic framework is to encourage competition and discourage monopolies. In fact, the institution of al-hisbah in the early Islamic history used to play this role. In this age, the Islamic economy will have to set up various regulatory bodies. But mere setting up of regulatory bodies does not serve the purpose. It has also to be ensured that these bodies perform well and achieve their objectives. For this purpose the SAIs can be invited to carry out periodic evaluation of the regulatory bodies and report on their effectiveness. This will be an extension in the role of the SAI in the new century. 6.9 AUDIT OF PUBLIC DEBT Ideally an Islamic state should not live beyond its means. It should not resort to borrowing as a matter of course for its revenue generating expenses. But we know that a large number of Muslim countries are in deep domestic and foreign debt. There is no likelihood that this state will materially change, at least, in the early years of the 21st century. Besides, the need for borrowing cannot be eliminated altogether, in view of the large amounts of capital needed to build infrastructure or to meet situations arising out of emergencies and wars. Even the Prophet (SAW) borrowed for the battle of Hunayn. In this perspective, the only prudent course is for countries not to borrow what they cannot repay. They should not borrow for unproductive purposes. They should not borrow what is not essential. They should make sure that the benefits of borrowed funds accrue to the society at large and are not expropriated by a privileged elite. In this perspective, the SAI can play an effective role. For example:
• Audit reports on public debt of several countries have revealed that the accounting of public debt is in bad shape. The governments of these countries do not adopt sound definition and disclosure policies to account for the public debt. As a result, the public at large remains oblivious of the actual liabilities. The SAIs can play a leadership role in persuading governments to adopt sound and proper definition and disclosure practices for the accounting of public debt.11The SAI can help in ensuring that the decisions with respect to public debt are based on adequate disclosure to all affected parties of complete and reliable information on the likely effects of the proposed borrowing. The SAI can provide audited debt figures, classifying them into various categories, such as interest costs, additional loans to pay off past loans, amortization of existing loans, cost of loans as compared to the international market, cost of tied loans, leakage from the public debt, etc.
• The SAI can report on the terms of public debt and the possible implications for inter-generation equity. The SAI may undertake independent analyses of the data disclosed to foster improved management of the debt and improved understanding of the current and future implications of public commitments.12 Some of the relevant ratios are: interest bite, expenditure ratio, tax bite, debt to GDP, debt service to exports, etc.13 Governments provide guarantees for the debts the public sector corporations but sometimes, they also bail out private sector companies with their guarantees.
• Similarly, politicians under pressure from their electorates or because of emergencies make announcements for various benefits to certain groups of people. The real cost of such commitments remains hidden from the public eye. The SAI can carry out audits of such commitments or guarantees and report on their cost to the public.
• In brief the SAIs can provide audited information on the following indicators:14
• Total debt due, showing separately the gross amount borrowed and the amount applied to repay the existing debt and the net inflow during a specified period.
• The amount of foreign debt. This is important as repayment will involve outflow of resources to foreigners.
• The debt denominated in foreign currencies and the rates of exchange used in valuation.
• Restructuring costs.
• The use of funds and the benefits derived from them.
• Actual levels of various flows and stocks as compared to estimated levels.
• Risk assessment and vulnerability to fluctuations in rates of interest and exchange rates.
• Repayment by end-users if the government borrowed funds on behalf of a provincial government or a public enterprise. 6.10 ENVIRONMENTAL AUDITS There is now general awareness agreement that sustainable development hinges to a large extent on the ability of a country to protect its environment. Therefore, almost all countries are framing laws and policies to regulate industry and trade with a view to protecting the environment. Also, huge investments are being made in programs for environmental protection. This emphasis on the environment is going to stay. In fact, the pressure from neighboring countries and the global community will force the Islamic economy to adopt suitable measures for protecting the environment. Even if we were to ignore the global movement towards environmental protection, the Islamic concern about public interest (maslahah) will place these issues very high on the agenda. In the past, the institution of al-hisbah played this role to some extent. The muhtasib used to ensure that professions like tanning of leather and dyeing of cloth were located away from the main populated areas. The idea was to protect the larger public interest.
In this area, also, the SAI can play a significant role. Environmental audits can focus on the following kinds of entities:
• Entities which themselves impact on the environment whether positively or negatively — for example, through rehabilitation of the environment or, conversely, through pollution or utilization.
• Entities with powers to make or influence environmental policy formulation and regulation, internationally, nationally or locally.
• Entities which have the power to monitor and control the environmental actions of others.
It is now generally agreed that the SAI can undertake three types of environmental audits:
• Financial audits: The objective of environmental aspects of financial audits is to enable the auditor to establish whether the reporting entity has appropriately recognized, valued and reported environmental costs, liabilities and assets.
• Compliance audits: The purpose environmental aspects of compliance audits is to enable the auditor to establish whether the entity has conducted the environmental activity in compliance with applicable obligations.
• Performance audits: The purpose of environmental aspects of performance audits is to enable the auditor to form an opinion on:
• The validity of performance indicators used by the entity when publicly reporting its performance in conducting environmental activity.
• Whether the entity has conducted the environmental activity in an effective, efficient and economical manner. 6.11 LEADERSHIP ROLE IN REFORMING GOVERNMENT ACCOUNTING At present, with the exception of New Zealand, Australia, Canada and (partly) the UK, government accounts are kept either on a cash basis or on a modified cash basis, whereas private sector accounting is accrual-based. We think that the accrual-based accounting is nearer to the Islamic concepts of equity and fairness. Accrual-based accounting discloses the liabilities of the government fairly. It informs the readers of government financial statements about the debts incurred, and commitments made by the present government, that will have to be honored by the future generations. Thus accrual-based accounting creates a consciousness about inter-generation equity. By contrast, cash-based accounting does not disclose the arrears of unpaid present liabilities that are being pushed into the future Although government accounting is primarily the function of the executive, the SAI can act as a catalyst in persuading governments to adopt accrual-based accounting.
The SAIs can take the lead in helping the governments to develop appropriate financial reporting and disclosure standards in the following areas:
• Details of programs and their physical achievements for (a) alleviating poverty; (b) reducing income inequalities; (c) promoting justice and fairness; (d) diluting economic power of various groups, agencies and corporations, and (e) reducing market imperfections and promoting competition.
• Performance indicators for various departments, agencies and programs.
• Analytical framework for deciding whether certain activities should be undertaken by the government or should be contracted out.
• Basis for measuring condition, age, and serviceability of physical infrastructure. 6.12. AUDIT OF SOCIAL SERVICES AND PUBLIC ADMINISTRATION The Islamic economy, like any other modern economy will be expected to provide various social services efficiently and effectively. Governments must meet the basic needs of their citizens before the citizens raise their voices in protest. The most prominent example is the system of zakăt. On the one hand, the zakat-paying public will expect that zakăt is collected from them with due regard for convenience, economy, and confidentiality, while zakat recipients will want to receive their due in a dignified manner. Governments will also want that the zakăt systems operate economically and with minimal leakage and waste. In public administration, the citizens will want to have various types of information at least cost and in a manner that rent seeking is eliminated. One of the priorities of an Islamic economy is to make information flows as inexpensive and as equal as possible so that market imperfections are minimized. In the coming millennium, this will be a big challenge for governments, since citizens will have greater access to information technology (IT). The government officials will have mobile computers with them having links with the main IT systems. As a result, they will be able to provide information on various operations on an instant basis. Similarly, most people will have internet facilities in their home. They will want to know what the decision-making processes are in various departments and agencies, and the exact stage a particular file or document has reached in those processes. They will also want to have information available about various decisions and policies (within a certain framework). From an Islamic perspective, this is especially desirable. Providing citizens and other interested parties with access to such information makes government functionaries accountable. It reduces the chances of corruption and fraud in public service. Citizens will want that most government reports and documents be available on the internet with no cost. These developments are already in progress elsewhere: it will not be possible for Islamic governments to remain aloof from them. What are the implications for the SAI in this environment? One conclusion is that auditing can be extended to doing more than checking faults and shortcomings in the system. The audit can look at various services from the perspective of citizens. It can also evaluate interface between government information and citizens and companies. The objective will be to see that the government has reliable means to receive feedback on the various services it is providing. Another aspect will be to see if the government has adequate systems in place to provide sufficient information to the citizens regarding various changes in laws, regulations and procedures. 7. FRAMEWORK FOR REALIZING SHARI’AH GOALS THROUGH THE SAI The SAI can serve the functions outlined in the foregoing only if a suitable supportive framework is in place. For this purpose the Islamic economy would need to focus on the following elements of the framework:
a. Mandate of the SAI
One of the first things would be to expand the role of the SAI with suitable legal changes so that it is possible for the head of the SAI to perform all the functions mentioned in this paper.
b. Training of Auditors
The SAI would need to determine the knowledge and skill requirements of its staff for the expanded role outlined here. It would need to re-design and re equip its training programs, teaching materials and training methods. The training courses should contain an ethics component to enable the auditors to audit against corruption and fraud, as well as to display the highest integrity in the conduct of their duties.
c. System of Oversight and Internal Evaluation
As the SAI would be acting as a watchdog over all departments, agencies and Ministries, it has to show that its own systems and procedures are highly efficient. For this purpose, the SAI should install a system of internal audit for financial auditing of its expenditure, a system of internal evaluation of operations and a system of certification by external auditors. This three-pronged mechanism should be sufficient to give an assurance to all executive agencies that the SAI is the office of highest proficiency.
d. Interaction with People and the Civil Society
The traditional role of SAIs is that they conceive their annual work plan in the light of their resources and the priorities of the government in respect of income and expenditure. In the process, the preferences of the people and other elements of civil society are left out. Since an Islamic economy is supposed to be in the service of the people in the real sense, the SAI should install a mechanism to get suggestions from the people in general and members of the civil society in particular about the areas to be audited and issues to be examined This would enlarge the scope of accountability of the executive agencies. 8 CONCLUDING REMARKS An Islamic economy in the 2lst century will be part of the emerging global economy. There will be strong backward and forward linkages which an Islamic economy will not be able to ignore. The paper has tried to visualize the emerging trends in the role of SAIs in Islamic countries. Due to international pressures and the Islamic value system there will be a need to expand the scope of the SAIs. The expanded scope, as visualized in this paper, would enable the SAIs to play an effective role in realizing the objectives of an Islamic economy. It is encouraging to note that the emerging trends in the role of SAIs are quite close to what the value system of Islam would prescribe. In the final analysis the Islamic economy stands for freedom, justice, fairness, protection of public interest and elimination of exploitation and corruption. There is hardly anything in this frame that would be disagreeable to the present day or future civilized societies. Thus the time is quite ripe for transforming the traditional role of the SAIs in Islamic countries so that the potential of these institutions is fully realized. END NOTES
1. As quoted by Ira Sharakansky in Friedlberg et al. (1991, 5).
2. See Lokegaard (1949).
3. For a general background of the concept, see Khan (1994).
4. World Bank (l997, 19).
5. INTOSAI (1997, 24).
6. ibid.,29.
7. ibid.,35.
8. ibid.,38
9. INTOSAI (1995, 9).
10. ibid.,1l.
11. ibid.,22.
12. ibid.,21-31.
13. Khan (1982, 138- 46).
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Key words: Performance auditing, Audit institutions, Islamic economics |
