• Voluntary Cost Audit…Paradigm shift towards inclusiveness in

Reporting Mechanism.

Cost Audit.. Historical Perspective

Maintenance of Cost records and Accounts and audit of the same

has been enshrined in the Companies Act 1956 viz section 209(1)(d) and
section 233(b).These sections gave ample discretion to the administrative
ministry in the matter directing the companies to maintenance of books of
accounts reflecting cost of production and its scrutiny by a public accountant.

The Purpose of maintenance of cost accounting is amply

specified in the words of the then Dy. Minister of commerce and industry
Government of India who tabled the ICWAI bill “A cost Accountant works out
the economical cost of production and evaluates the progress at each stage
of production ,making the organization efficient and economical by providing
the minimum of labour and material and getting the full capacity of machine
output”.

Cost Audit was intended to quote in the words of Smt Tara

Ramachandra sathe(MP) in a parliamentary debate way back in 1965 “Cost
audit is quite different from financial audit . it is to see whether the labour is
efficient or not ,whether material and every part of it used is to the optimum
extent…”She had demanded then that cost audit should not be discretionary
and to quote her again “…it is essential, no doubt, and in factories and
industries, everywhere this cost audit should be emphasized”.
And to quote the Hon.Minister of finance shri.T.T.Krishnamachari “ while we
have made it obligatory or semi-obligatory our intention is to ask the
industries to have a cost accountants report”.
And
“when we have sufficient number of cost accountants to make it obligatory
for every company and every producing and manufacturing
concern( unquote: not being a company) to have a cost accountants report.

But the intention expressed initially remained to be fulfilled in

spirit for various reasons and that compelled various committees and
commissions to observe strongly in favour of cost audit, the latest being
committee on subordinate legislations(fourteenth Lok Sabha):
“The committee regrets to note that even after 38 years after enactment of
the relevant provisions empowering the Government to prescribe cost
accounting record rules , they have not covered major industries and
projects…….The slow pace negates the very purpose of this important
provision of the legislation passed by the parliament…..The committee also
felt that the absence of enabling provision in the companies act should not be
the reason for not prescribing CARR to service industry…”

The J.J.Irani Committee, therefore, took the view that while the
enabling provision may be retained in the law providing powers to the
Government to cause Cost Audit, legislative guidance has to take into
account the role of management in addressing cost management issues in
context of the liberalized business and economic environment.

Industry perspective..emerging trends

Having quoted these , one cannot overlook the fact that the business
needs ascertainment of cost and that too in real-time in order to arrive at the
price and establish a pricing mechanism, to re-engineer processes and
ensure sustainability.

Thus while prescriptive mechanism initiated by the government way

back in 1965 had its own perception to meet the need of social obligation
committed in the constitution of India, maintenance of Cost accounts in some
form or the other had been prevalent and in continuous usage in India and
elsewhere and will continue to be so for times to come.

While the historical perspective of cost audit had always taken the
industry on the back foot , contemporary and emerging trends have always
been welcome from the stakeholders- sans government , which is why one
will find that more and more demand for sustainable reporting methodology
drawn in the accounting world.

While as professionals we should let the government to ponder on

the relevance of its prescriptive mechanism such as CARR and limit ourselves
to the focus only towards the implementation part of it , we shall do better in
concentrating our energies on impressing the businesses on the need for
schematized cost accounting and reporting requirement as a stepping stone
for a good and sustainable business governance.

Company Bill 2008:

The new company bill 2008 has shown us the path for the focus
towards sustainability reporting through a provision of voluntary cost
accounting and reporting mechanism.

Professional should understand the import of the provision and

devise the way it can be taken forward. No doubt it is a difficult path to travel
but one should appreciate the government intent in enumerating a self
regulatory mechanism in the context and with in the ambit of the bill.

The relevant provisions are as follows:

Section 2(m)
(m) “books of account” includes records maintained in respect of—
……
(iv) in the case of a company which belongs to any class of companies
specified under section 131, such items of cost as may be prescribed under
that section;

2 (zb) “cost accountant” means a cost accountant as defined in clause (b) of

subsection (1) of section 2 of the Cost and Works Accountants Act, 1959 and
who holds a valid certificate of practice under sub-section (1) of section 6 of
that Act;

What the provision mean to us:

131 (3) Where a company includes the particulars relating to items

of cost in the books of account in pursuance of a resolution passed by the
company, the audit of cost records as contained in the books of account of
the company shall be conducted by a Cost Accountant in practice who shall
be appointed by the Board on such remuneration as may be determined by
the members in such manner as may be prescribed:
Provided that no person appointed under section 123 as an auditor of the
company shall be appointed for conducting the audit of cost records.

Implications:
Section 131 is a very comprehensive and a bit complex section to
understand while subsection 1 & 2 talks of prescriptive books of accounts and
cost audit, subsection 3 has been inserted very independent of the
subsection 1 & 2 , subsection 3 is an enabling provision and a non-
discretionary one, it does not also depend on the prescription or direction of
the administrative ministry.

1.It gives full powers to the shareholders of a company to Resolve to

maintain books and records reflecting Cost Accounts of the businesses.
2.It is not industry specific nor is it product specific and thus the provision
 can empower companies to activate cost accounting and audit which
are company-wide rather that product-wide.
3.Once a resolution is passed it is mandatory or incumbent on the
governance of the company to conduct cost audit by appointing a cost
auditor(cost accountant in practice) through a board resolution.
4.There is a specific saving from abuse by a statutory financial auditor
posing himself as qualified cost accountant through a negation to be
appointed as a cost auditor .This serves another purpose as well,
conflict of interest in scrutinizing two exclusive set of books of
accounts.
5.The Intention seems to be clear viz to make Cost accounting and cost
audit stakeholder friendly. To push the point that Cost accounting and
cost audit is not only the cup of tea of Government but other
stakeholders involvement is as vital and self regulation at the earliest
stage of implementation is visible.

Expectations for a healthier Start:

In the light of the foregoing the following are required to be initiated

by various interested groups to make the provision vital and acceptable in
the long run helpful for business sustenance and growth:

1.The professionals in the industry need to emphasise the management of

the importance of cost consciousness and the need to align ‘Cost
reporting and regular scrutiny by the public accountant ‘ with cost
management sustainability reporting and business process
engineering.The professionals in the industry also need to tweak their
skill set towards emerging interest in Cost and management
accounting and involve in designing and implementation of a system of
reporting for the industry or businesses he or she is working for.

2. Members in practice should involve in qualitative scrutiny and

reporting that can become a bench
mark and subsequently hall mark of the profession. Since the provision
has triggered a mechanism of self-regulation it is important to ascertain
the needs of the stakeholders and prepare a check-list to an approach to
scrutiny of accounts. In due course public accountants can engage in
standardizing harmonizing outputs that addresses the business needs.
3. The Institute needs to come with a specific campaign on
implementation of this provision specifically through industry associations.
Preparing documents that addresses the needs of such maintenance of
accounts and records and checklist for scrutiny and sometimes coming up
with output formats industry wise. Attempt should be a continuous
process through a committee in the council established to oversee into
the aspects of voluntary cost audit.Cost accounting standards should be
made generic to address the issues of various stakeholders.
4. Administrative ministry may also involve in initiating the process of
company indulgence in the
exercise of voluntary cost audit and can seek a compliance report
annually whether the companies had attempted the implementation of
this provision and if so its usefulness or otherwise.
5. Trade associations can take this forward to address issues such as
sustainable reporting, fair
business practices, bench mark of good governance etc.

Conclusion:

In essence the provision seems to be a path breaking step in the

direction of self-regulatory corporate governance and need to be
appreciated by one and all. It also transfers lot of responsibility to the
profession of CMAs and enables transparency in business operation.

The provision need to be carefully implemented in order to avoid

delivering initial jerks and allow voluntary and smooth transition and
acceptance.

An expert committee and a peer group at the Institute level is vital to

see that this provision is not only implemented smoothly but also
strengthens corporate governance by delivering at desired levels.

CMA.R.Veeraraghavan. FICWA,LL.B