Saturday, 7 May 2011

Mandatory Cost Audit - A Necessary Devil?

So here comes the NEWS. The government has changed the applicability of the Cost Audit from industry/company-specific to generic.

On one had it marks a good attempt to fill the loopholes in existing policy of applicability of cost audit to various sectors and companies but on other, it calls for raising a basic question - "Is cost audit necessary"?

Of course, (nandatory) cost audit is, still, supposed to be one of the vital bases for formulating regulatory/legal framework relating to price control (like pharma, fertilizers), excise and other levies (like cement,agrochem) and other direct or indirect taxation.

But, as a matter of fact, most of the companies coming under applicability of cost audit, take it just as yet-another-compliance statement (it may be noted that the author is a qualified cost accountant having spent three years at cost audits of various industries). No company would like to dilute the information on the productwise cost component split, willingly. I am neither saying that they are correct nor that they have fullest right not to disclose this kind of information. However, I feel that companies will comply with the requirements of section 233B [cost audit], 201 (1) (d) [cost accounting records] of companies act happily only and only if they feel, it is a "value-adding" activity for the company itself (well, the ICWAI has been stressing that it IS a value additive activity, but in fact, it is nowhere visible from the format and ingredients of the Cost Audit Report.

The cost audit, by its nature itself, is quite different from other forms of financial audits like statutory / internal / concurrent / tax. Financial audits have a well defined rules and framework (like Accounting Standards). However, in case of cost accounting records the methodology and parameters for cost measurement or assessment or allocation or apportionment differ from industry to industry (it even differs in companies of different size, operational area within same industry). The existing set of CAS (cost accounting standards are definitely not sufficient to cover them all. Moreover, the industry-specific Cost Accounting Record Rules need a detailed review and serious make-over with the changing situations.

There are very few countries in the world which have this kind of mandatory cost audit (and the countries where it is not mandatory or it is not at all existing comprise of all sorts like capitalist, socialist and communist). In India, it was made mandatory in line with socialist principles set by our Government in early days with a view to "general good". It had vital importance in the days of pre-deregulations. The Institute made a good attempts of revising the format of cost audit report in last decade. It needs to cover whole gamut of cost optimisation with respect to ensuring optimum pricing and utilisation of countries resources. For example, when the provision covers Cement industry, it is understood that cement is a basic factor of countries infrastructure. But then, the Realty sector also needs to be covered to ensure that the planned benefit of policy which may be based on the cost audit reports of cement companies, are delivered to the society, the ultimate user and owner of the national resources. Likewise, covering consumer electronics seems beyond reason based on the ideas behind the applicability of cost audit.

The point is not to prove the cost audit redundant or useless. It is an endeavour to make it more comprehensive and useful for the nation as well as the corporates (and ultimately the consumer). I think, let's hope that the current move by the Government is the initial step towards the same.....

What do you think?


Anonymous said...

I think that Mr. Sen should read the Expert Group Report on Cost Audit.

This Report clearly states the road map for making Cost Audit productive for Industry and Government of India.

CAS's issued are for laying guidelines for making Cost Accounting meaning full.

I am not sure whether Mr. Sen has any proposals for Making CAS's more meaning full?

In today’s world Cost Audit is a Report for the Board of Directors and Audit Committee for better decision making pertaining to Costing and Pricing.

This is especially for the listed companies and companies operating with Bank borrowings.

Anonymous said...

Does Mr Sen know, that there are companies which opt for Voluntary Cost Audit?

This should speak for the Value Addition that Cost Audit creates for Industry

Pawankumar Nathani said...

All audits (per se compliances) are termed as necessary evil....

the question is why did these fields develop? definitely not for generating revenue for specific professionals or to increase the bureaucratic work of government...

somewhere we have lost the purpose of these compliances (more driven by semantics than by schematics)

Cost Audit Reports reveal wealth of information (as these were specific for industry) & these cannot be ignored.. making it generic will make them more cosmetic and pure compliance driven.. its purpose will get lost..

These reports have to be compared within industry.. cross industry comparisons cannot be made, so generic format will not work to its intended objective (if the objective is value-addition).

This definitely needs more thinking than this apporach..