Propriety audit

Propriety Audit: Propriety Audit stands for verification of transactions on the tests of public
interest commonly accepted customs and standards of conduct. E.L. Kohler has defined the
term propriety as "that which meets the tests of public interest, commonly accepted customs
and standards of conduct, and particularly as applied to professional performance,
requirements of law, government regulations and professional codes". Instead of too much
dependence on documents, vouchers and evidence, it shifts the emphasis to the substance of
the transactions and looks into the appropriateness thereof on a consideration of financial
prudence, public interest and prevention of wasteful expenditure. Thus propriety audit is
concerned with scrutiny of executive actions and decisions bearing on financial and profit and
loss situation of the company with special regard to public interest and commonly accepted
customs, and standards of conduct. It is also seen whether every offer has exercised the
same vigilance in respect of expenditure incurred from public money, as a person of ordinary
prudence would exercise in respect of expenditure of his own money under similar
circumstances. Propriety requires the transactions, and more particularly expenditure, to
conform to certain general principles. These principles are:
(i) that the expenditure is not prima facie more than the occasion demands and that every
official exercises the same degree of vigilance in respect of expenditure as a person of
ordinary prudence would exercise in respect of his own money;
(ii) that the authority exercises its power of sanctioning expenditure to pass an order which
will not directly or indirectly accrue to its own advantage;
(iii) that funds are not utilised for the benefit of a particular person or group of persons and
(iv) that, apart from the agreed remuneration or reward, no other avenue is kept open to
indirectly benefit the management personnel, employees and others.
The Parliament and Government, with a view to knowing the standards of efficiency, propriety,
cost consciousness and economy, have already come up with some provisions in the
Companies Act, 1956 having direct or indirect bearing on propriety; some of these provisions
are:
(i) Section 209(1) (d) relating to Cost Accounting Records.
(ii) Section 227(1A) requiring enquiry into certain specified matters.
(iii) Section 227(4A) requiring a supplementary statement on matters specified in the
Companies (Auditor's) Report Order.
(iv) Section 233B - requirement of Cost Audit.
(v) Section 619(3)(a) requiring a supplementary statement in respect of the Government
Companies on matters specified.
(vi) Certain information in Revised Schedule VI, Part II.
Problems in propriety audit, however, arise mainly because of its distinct nature. The
expression "propriety" is a moral term and can be understood by reference to the concept of
morality accepted by the society at a given time. In any auditing, the essential test lies in
formulation of auditing propositions. In the audit of financial accounts by reference to financial
and legal requirements, propositions are built up about happening of events, existence,
accuracy, title, ownership, compliance with law and internal regulations, etc., which are all
verifiable. Propriety audit has an inherent element of subjectivity because it is very difficult to
establish standards of public interest, commonly accepted customs, standards for conduct
which are not firm basis for audit evaluation. To take care of this situation, the C&AG has
developed the norms of propriety for expenditure of public funds in our country .By laying
down the standards of propriety for Government expenditure the C&AG has really tried to
tackle in a practical way the complex problem of subjectivity inherent in a situation calling for
propriety consideration.
Another dimension of the problem noticed in the application of propriety norms in the
Government sector needs also to be taken into account. The norms are applied often too
mechanically and create problems for expeditious and efficient working. In private sector, this
attitude may prove counter-productive. Propriety as a moral element should be a matter of
evaluation based on objectives and prevailing circumstances. The element of subjectivity has
caused proper discharge of duty very delicate and demands discretion, but wisdom of taking
commercial decisions under dynamic environment (the economic, social and political) must be
evaluated with reference to the circumstances in which these were taken and therefore, the
auditor in his field must reconstruct such circumstances. The judgement of the auditor must be
objective as otherwise it would dampen the initiative of management and others in taking
commercial decisions and propriety audit would prove itself to be counter productive.