MCA HAS TAKEN U-TURN IN ABRIDGING THE SCOPE OF COST
AUDITS IN THE DRAFT RULES OWING TO INDUSTRY PRESSURE
By
K P C Rao, LLB, FCMA, FCS.,
CMA (USA), FIPA
(Australia)
Practicing Company
Secretary
kpcrao.india@gmail.com
Background
Business sustainability depends greatly on cost and
competitiveness. In a liberalized and growing economy, effective use of
productive resources is the main challenge.
The survival and growth of an organization depends on competitiveness and competing edge of various parameters like
adaptability, technology, quality, timeliness
etc. and the most important the ‘Cost’. The entrepreneurs should have
clear understanding of both the operational cost and marginal cost for
decision-making purpose. They should also bring improvement in time management
system for better labour productivity and increased efficiency. The industries
can optimize their cost of production by adopting Cost control techniques. Cost
accounting system builds competitiveness in the Industry, and helps maintain competitive
cost advantage to face the global challenges. Having realised the importance of
the ‘Cost’, the Ministry of Corporate Affairs (MCA) had appointed an expert
group during 2008 and implemented its recommendations in 2011. However, the MCA
has now taken a total U-turn on its stand and substantially reduced the scope
of the cost audit in the draft rules, due to industry pressure.
The Companies
(Cost Records and Cost Audit) Rules, 2013
The latest Draft Rules issued by MCA in exercise of the powers conferred by sub-sections (1)
and (2) of section 469 and section 148 of the Companies Act, 2013 (18 of 103), related
to the cost records and audit mechanism may lead to substantially curb the
scope of the cost audit profession and affect the cost practitioners if
implemented. The draft rules proposed to be applicable in respect of financial
year commencing on or after 1st April, 2014. The draft rules curtail
cost audits as discussed below:
(a) First,
the number of industries covered is reduced. At present, a company engaged in
production, processing, manufacturing, or mining activities is required to
maintain cost records. Further, all listed companies are required to maintain
cost records. Whereas, under the proposed rules Cost audit is applicable only to
a company (including foreign companies) for which cost audit is ordered by the
central government, as the draft rules require only those companies that are
operating in strategic sectors or in industries that are regulated by a
sectoral regulator, or a Ministry or Department of Central Government or in
some specified industries such as manufacturing of components and equipment
being used by railways, minerals and ores. It also covers healthcare services
and education services.
(b) Secondly,
the turnover and net worth threshold has been increased substantially. The
threshold has been increased from net worth of Rupees Five crore to 500 crore
and the threshold of turnover from the specified product is fixed at Rupees 100
crore.
(c) Third,
apart from the companies required to undergo cost audit, all others have been
exempted from maintaining even cost accounting records.
Conclusion
It is to be understood that the
Cost Audit is different from Financial Audit. Financial Audit merely focuses on
compliance to the Law and the reporting needs of 'Shareholders' of the company,
who are wealth creators of the business. It does not evaluate a company's
performance with regard to cost of production. It also does not speak about the
internal strength, efficiency, and sustenance aspect of the business. Cost
Audit focuses on performance evaluation and the stakeholders at large. It helps
improve performance and production efficiencies by detecting deviations from
standards, and reasons of visible and invisible losses, inefficiencies,
wastages etc. It provides answers to the questions like “to what extent the
labour is efficient or whether material
is being used to the optimum extent?" It speaks amply about utilisation of
resources, which is vital for managing the economy.
Cost Audit is admitted
internationally by business enterprises as a management tool, rather than as a
cost verifying mechanism. Cost accounting techniques, which are prescriptive
(e.g. budgeting, standard costing, variable costing
The impact would be at least 90%
of the economic activity will be out of the purview of cost records and cost
audit. Moreover, they will be deprived of the resultant benefits associated
with cost audit. Futher, the
implementation of the draft rules could jeopardise prospects of many who left
other jobs to practise cost accounting. The profession will not be able to
attract talent and it will become weak. This will hurt all the stakeholders in
the longrun.
The
draft rules are in the public domain for comments and suggestions of
stakeholders by 6th, December 2013. [Published in 'Circuit', monthly journal of ICAI, Hyderabad during December, 2013]
