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Voluntary Cost Audit

Voluntary Cost Audit

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Voluntary Cost Audit.
Voluntary Cost Audit.

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Published by: Cma Veeraraghavan AR Iyengar on Jan 27, 2011
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06/14/2011

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Voluntary Cost Audit…Paradigm shift towards inclusiveness inReporting Mechanism.Cost Audit.. Historical Perspective
Maintenance of Cost records and Accounts and audit of the samehas been enshrined in the Companies Act 1956 viz section 209(1)(d) andsection 233(b).These sections gave ample discretion to the administrativeministry 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 amplyspecified in the words of the then Dy. Minister of commerce and industryGovernment of India who tabled the ICWAI bill “A cost Accountant works outthe economical cost of production and evaluates the progress at each stageof production ,making the organization efficient and economical by providingthe minimum of labour and material and getting the full capacity of machineoutput”.Cost Audit was intended to quote in the words of Smt TaraRamachandra sathe(MP) in a parliamentary debate way back in 1965 “Costaudit is quite different from financial audit . it is to see whether the labour isefficient or not ,whether material and every part of it used is to the optimumextent…”She had demanded then that cost audit should not be discretionaryand to quote her again “…it is essential, no doubt, and in factories andindustries, everywhere this cost audit should be emphasized”.And to quote the Hon.Minister of finance shri.T.T.Krishnamachari “ while wehave made it obligatory or semi-obligatory our intention is to ask theindustries to have a cost accountants report”.And“when we have sufficient number of cost accountants to make it obligatoryfor every company and every producing and manufacturingconcern( unquote: not being a company) to have a cost accountants report.But the intention expressed initially remained to be fulfilled inspirit for various reasons and that compelled various committees andcommissions to observe strongly in favour of cost audit, the latest beingcommittee 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 costaccounting record rules , they have not covered major industries andprojects…….The slow pace negates the very purpose of this importantprovision of the legislation passed by the parliament…..The committee alsofelt that the absence of enabling provision in the companies act should not bethe reason for not prescribing CARR to service industry…The J.J.Irani Committee, therefore, took the view that while theenabling provision may be retained in the law providing powers to the
 
Government to cause Cost Audit, legislative guidance has to take intoaccount the role of management in addressing cost management issues incontext of the liberalized business and economic environment.
Industry perspective..emerging trends
Having quoted these , one cannot overlook the fact that the businessneeds ascertainment of cost and that too in real-time in order to arrive at theprice and establish a pricing mechanism, to re-engineer processes andensure sustainability.  Thus while prescriptive mechanism initiated by the government wayback in 1965 had its own perception to meet the need of social obligationcommitted in the constitution of India, maintenance of Cost accounts in someform or the other had been prevalent and in continuous usage in India andelsewhere and will continue to be so for times to come.While the historical perspective of cost audit had always taken theindustry on the back foot , contemporary and emerging trends have alwaysbeen welcome from the stakeholders- sans government , which is why onewill find that more and more demand for sustainable reporting methodologydrawn in the accounting world.While as professionals we should let the government to ponder onthe relevance of its prescriptive mechanism such as CARR and limit ourselvesto the focus only towards the implementation part of it , we shall do better inconcentrating our energies on impressing the businesses on the need forschematized cost accounting and reporting requirement as a stepping stonefor a good and sustainable business governance.
Company Bill 2008:
The new company bill 2008 has shown us the path for the focustowards sustainability reporting through a provision of voluntary costaccounting 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 travelbut 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 companiesspecified under section 131, such items of cost as may be prescribed underthat 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 andwho 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 itemsof cost in the books of account in pursuance of a resolution passed by thecompany, 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 shallbe appointed by the Board on such remuneration as may be determined bythe members in such manner as may be prescribed:Provided that no person appointed under section 123 as an auditor of thecompany shall be appointed for conducting the audit of cost records.
Implications:
Section 131 is a very comprehensive and a bit complex section tounderstand while subsection 1 & 2 talks of prescriptive books of accounts andcost audit, subsection 3 has been inserted very independent of thesubsection 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 tomaintain books and records reflecting Cost Accounts of the businesses.2.It is not industry specific nor is it product specific and thus the provision

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