RIL had sought, inter alia, to restrict KG-D6 block audit to accounting books and records

Refusing the demands of the Mukesh-Ambani-owned Reliance Industries Limited (RIL), the Comptroller and Auditor General (CAG) has stated that the operator’s “restrictive conditions” for carrying out an audit of the KG-D6 offshore block “impinge upon the basic mandate, rights and obligations of the [CAG]” to conduct as well as report the results of its audit to Parliament.

In a letter to Petroleum Secretary G.C. Chaturvedi on October 26, two days before Jaipal Reddy was shunted out of the Petroleum Ministry, the CAG stated that the restrictive conditions were unacceptable to it and the CAG’s (Duties, Powers and Conditions of Service) Act gave it an unfettered right and would override all conditions sought to be imposed on the audit process.

According to the CAG, RIL’s conditions included that: (i) Audit will be restricted to “accounting books and records”; (ii) audit of the years that are time-barred would be subject to the consent of the operator; (iii) audit report is to be submitted to the Ministry and not Parliament; (iv) the audit would be subjected to confidentiality arrangements between parties to production-sharing contract (PSC), and the CAG would be bound not to use the information acquired during such audit for any other audit under the CAG’s (DPC) Act.

“It would not be possible for us to conduct audit under such restrictions imposed by the operator [RIL],” Principal Director of Audit, Economic and Service Ministries A.M. Baja has stated in the letter.

The Petroleum Ministry on October 23 wrote to the CAG requesting it to commence audit of KG/DWN 98/3 hydrocarbon block under Section 1.9 of the accounting procedure of the PSC. The Ministry also wrote to the RIL saying that audit under Section 1.9 of the PSC was “perfectly legal and laid out under CAG’s [DPC] Act.”

Clarifying its position on the audit, the CAG has stated: (i) We are agreeable to undertake audit under Section 1.9 of PSC on the lines we have done earlier; (ii) we are not contemplating performance audit of the operator/s in such audit; (iii) the scope, extent and manner of audit would be as laid down under CAG’s (DPC) Act and the results of audit would be communicated to the Ministry and would be used for reporting to Parliament.

“We, however, find that the proposed audit as committed to the operator by the Ministry vide letter dated October 23, would have to be undertaken by us in accordance with certain conditions mentioned in RIL’s letter dated October 18. We find that these restrictive conditions impinge upon the basic mandate, rights and obligations of the CAG to conduct as well as report the results of audit to Parliament under the CAG’s [DPC] Act as well as the Constitution of India.”

Not consulted: CAG

In response to this, the CAG states in its letter: “We feel that the Ministry ought to have consulted us on issues that would have the effect of binding our audit, before committing on a subject to the operator in the manner it has been done. We would like to state that our audit cannot be restricted only to the accounting records, and books of the operator or to the documents and information provided at the discretion of the audited entity. Verification of charges and credits relating to the contractor’s activities and other documents considered necessary to audit cannot be merely limited to an arithmetical totalling of charges and credits and tracing of charges/expenses from the accounting statements to the operator’s vouchers. Our audit would extend to verification whether the costs depicted are correctly determined and in particular costs incurred for procurement of goods and services are determined through a transparent and competitive process so as to protect government’s revenue interests, especially as such costs are recovered from profit petroleum. We shall consider taking up the audit under Section 1.9 of the accounting procedure only if and when the Ministry ensures that the restrictive conditions are removed unambiguously before commencement of audit.”

‘Unfettered right’

Finally, the CAG states that it reserves the right to undertake an an independent audit of the entire mechanism of award of hydrocarbon blocks by the Ministry under Section 16 of the CAG’s (DPC) Act “as profit petroleum is a non-tax revenue credited to the Consolidated Fund of India and this would involve examination of all records (including those of the operator) that are relevant to our audit. This Section of the CAG’s [DPC] Act gives us an unfettered right and would override all conditions sought to be imposed on our audit process.