AUDIT REPORT ON THE ACCOUNTS OF DEFENCE SERVICES AUDIT YEAR 2015-16 AUDITOR-GENERAL OF PAKISTAN TABLE OF CONTENTS Page ABBREVIATIONS AND ACRONYMS iii PREFACE v EXECUTIVE SUMMARY vi AUDIT STATISTICS I. Audit Work Statistics xii II. Audit Observations Classified by Categories xii III. Outcome Statistics xiii IV. Irregularities Pointed Out xiv V. Cost-Benefit Analysis xiv CHAPTER-1 Ministry of Defence 1.1 Introduction 1 1.2 Status of Compliance of PAC Directives 1 AUDIT PARAS Pakistan Army 1.3 Recoverables / Overpayments 3 1.4 Loss to State 20 1.5 Unauthorized / Irregular Expenditure 25 1.6 Mis-procurement of stores 46 1.7 Non-production of Auditable Record 52 Military Lands and Cantonments 1.8 Recoverables / Overpayments 57 1.9 Loss to State 88 1.10 Unauthorized / Irregular Expenditure 113 1.11 Mis-procurement of stores 129 Pakistan Air Force 1.12 Recoverables / Overpayments 131 i 1.13 Loss to State 142 1.14 Unauthorized / Irregular Expenditure 146 1.15 Mis-procurement of stores 153 Pakistan Navy 1.16 Recoverables / Overpayments 159 1.17 Loss to State 167 1.18 Unauthorized / Irregular Expenditure 169 1.19 Mis-procurement of stores 171 Military Accountant General 1.20 Loss to State 175 1.21 Unauthorized / Irregular Expenditure 176 Inter Services Organizations (ISOs) 1.22 Loss to State 179 1.23 Unauthorized / Irregular Expenditure 180 1.24 Non-production of Auditable Record 181 CHAPTER-2 Ministry of Defence Production 2.1 Introduction 184 2.2 Status of Compliance of PAC Directives 184 AUDIT PARAS 2.3 Recoverables / Overpayments 186 2.4 Loss to State 191 2.5 Unauthorized / Irregular Expenditure 195 2.6 Mis-procurement of stores 198 2.7 Non-production of Auditable Record 201 Annexure-I MFDAC Paras (DGADS North) 204 Annexure-II MFDAC Paras (DGADS South) 210 ii ABBREVIATIONS AND ACRONYMS AGP Auditor-General of Pakistan AHQ Air Headquarters AMF Aircraft Manufacturing Factory BTS Base Trans receiver Station CBR Cantonment Board Resolution CLAR Cantonment Lands Administration Rules CMA Controller of Military Accounts CEO Cantonment Executive Officer CMH Combined Military Hospital CNE Civilian Non-Entitled CNA Controller of Naval Accounts CRV Certified Receipt Voucher DAC Departmental Accounts Committee DG DP Directorate General Defence Procurement DGP (Army) Directorate General Procurement (Army) DP (Air / Navy) Directorate Procurement (Air / Navy) DP Draft Para DHA Defence Housing Authority DSR Defence Services Regulations E-in-C Engineer in Chief FA Financial Advisor FAM Financial Audit Manual FBR Federal Board of Revenue FOB Free on Board FOR Free on Rail FR Financial Regulations GE Garrison Engineer GHQ General Headquarters GST General Sales Tax HIT Heavy Industries Taxila HRA House Rent Allowance iii INTOSAI International Organization of Supreme Audit Institutions JCOs Junior Commissioned Officers JSHQ Joint Staff Headquarters JSI Joint Services Instruction KARF Kamra Avionics and Radar Factory LC Letter of Credit / Local Currency LD Liquidated Damages MEO Military Estate Office MES Military Engineering Services MFDAC Memorandum for Departmental Accounts Committee MH Military Hospital ML&C Military Lands and Cantonments MoD Ministry of Defence MoDP Ministry of Defence Production NDU National Defence University NHQ Naval Headquarters NOC No Objection Certificate NLC National Logistics Cell PAC Pakistan Aeronautical Complex PAF Pakistan Air Force PAO Principal Accounting Officer PMB President Measurement Board PNS Pakistan Naval Ship PPRA Public Procurement Regulatory Authority QMG Quarter Master General R&E Risk and Expense RV&F Remount Veterinary and Farms SOP Standing Operating Procedure SRO Statutory Regularity Order STA Special Transfer Account TIP Transfer of Immovable Property TO&E Table of Organization and Equipment UA Unit Accountant UNRA United Nations Reimbursement Account iv PREFACE Articles 169 and 170 of the Constitution of Islamic Republic of Pakistan, 1973 read with Sections 8 and 12 of the Auditor-General (Functions, Powers and Terms and conditions of Service) Ordinance, 2001 require the Auditor-General of Pakistan to conduct audit of accounts of the Federation and the accounts of any authority or body established by the Federation. The Report is based on audit of receipts and expenditure of the Defence Services (Ministry of Defence and Ministry of Defence Production) for the Financial Year 2014-15. The Directorates General Audit Defence Services conducted Audit of the accounts of Defence Services during 2015-16. This Audit Report includes systemic issues and audit findings and relatively less significant issues are listed in the Annexure-I & II of the Audit Report, which shall be pursued in the Departmental Accounts Committees. In the cases where Principal Accounting Officers do not initiate appropriate action, the audit observations will be included in the Audit Report(s) of the following year for consideration of the Parliament. The Audit findings indicate the need for adherence to the regularity framework besides instituting and strengthening internal controls to avoid recurrence of similar violations and irregularities. Most of the observations included in this Report have been finalized in the light of discussions in the DAC meetings. The Audit Report is submitted to the President in pursuance of Article 171 of the Constitution of Islamic Republic of Pakistan, 1973 for causing it to be laid before the Parliament. (Rana Assad Amin) Auditor-General of Pakistan nd Dated: 02 June, 2016 v EXECUTIVE SUMMARY The Directorates General of Audit Defence Services (North and South) are Field Audit Offices (FAOs) of the Department of Auditor- General of Pakistan responsible for conducting the audit of budgetary grants of Defence Services (except Pakistan Ordnance Factories Wah) and Federal Government Educational Institutions in Cantonments & Garrisons, managed by Ministry of Defence (MoD) and Ministry of Defence Production (MoDP). Audit of other allocations made to Defence Services like Special Transfer Account, United Nations Reimbursement Account and Defence Pension is also conducted by these FAOs. Moreover, audit of the entities which are under these Ministries but do not get allocation from the Government e.g. Cantonment Boards, Frontier Works Organization are also under the audit purview of these offices. The jurisdiction of Directorates General Defence Services (North & South) has been made on geographical basis. The two Directorates conducted audit of 537 formations of MoD and 17 formations of MoDP during the audit year 2015-16. i. Scope and Objectives of Audit The audit was conducted in accordance with auditing standards of International Organization of Supreme Audit Institutions (INTOSAI) adopted by the Auditor General of Pakistan. Overall audit objective was to assess compliance with financial rules and adequacy of internal controls and examine the issues of propriety and economy of expenditure. An amount of Rs 719.612 billion and Rs 688.650 billion was allocated to the Ministry of Defence and Defence Production respectively for the financial year 2014-15 under Grant No. 26 and 27. Another amount of Rs 163.375 billion was allocated for Defence Pensions under Grant No. 33. A sum of Rs 4.136 billion was allocated under Grant No. 26 to Federal Government Educational Institutions in Cantonments and Garrisons. The Cantonment Boards budget was Rs 20.291 billion in 2014-15. vi An amount of Rs 25.791 billion was allocated under United Nations Reimbursement Account (UNRA) and Rs 75.289 billion in Special Transfer Account (STA) during the financial year 2014-15. The total auditable amount for the financial year 2014-15 was Rs 982.703 billion out of which an expenditure of Rs 166.226 billion was audited during the period from July to June, 2015 which comes out to be 17% of auditable amount. ii. Recoveries at the Instance of Audit A recoverable amount of Rs 34.394 billion was pointed out during audit. The executives have accepted Rs 1.990 billion as recoverable amount and recovered an amount of Rs 1.291 billion and US $ 0.509 million. iii. Audit Methodology The activities, policies, procedures and internal controls of audited organizations were reviewed for identifying risk areas, where occurrence of irregularities and misappropriation could be possible, and for devising strategy for audit scrutiny. Desk audit was conducted in case of big projects only for which computerized data was available online. Audit was conducted on the test-check basis with special emphasis on high monetary value and risk areas which could be prone to irregularities. Budgeted allocations made by Services Headquarters were compared and verified with the actual expenditure. iv. Audit Impact The issue of unauthorized use of A-I Land by Defence Services for commercial purposes has regularly been raised by Audit since 1986. However, a policy was finalized in April, 2008 but instances were noticed where Policy was being violated. Audit pointed out the issue during DACs and PACs and as a result of the persistent audit objections, a revised policy is being processed in the Ministry of Defence. The said policy is being framed in the light of issues raised by the audit from time to time. vii In view of the proactive approach of the Public Accounts Committee (PAC) and professional role of Audit, the MoD constituted various audit committees at Services Headquarters and also at lower level to comply with the observations. However, it was noticed that the scope of these committees was limited in nature and so far their contribution towards resolution of systemic issues raised by the Audit remained insignificant. Comments on Financial and Accounting Management i. The final grant No. 26 pertaining to Ministry of Defence for financial year 2014-15 was Rs 719,611.952 million against which expenditure of Rs 709,414.394 million was incurred. Thus, showing an overall saving of Rs 10,198 million which was, however, not surrendered in time. ii. The scrutiny of MAG office compilation revealed that it did not reconcile with sectional compilation prepared by CAAF Peshawar for the financial year 2014-15. In the absence of reconciliation of Rs.