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Should we bid adieu to cost audit?
October, 12th 2006
Totally scrapping cost audit or retaining the system in the present form are extreme positions that should be avoided In a rational economy any activity that adds no value has no justification to exist. Industry associations and industrialists have been voicing the view that cost audit provisions are burdensome, especially in the light of liberalisation and globalisation. While industry admits that cost accounting is an important management tool in today's competitive milieu, what is really being objected to is the preparation and reporting of cost data in the format prescribed by the government. The argument put forth is loss of confidential information and little utility to the management, as every well-run company has its own cost and budgetary control system. The money spent on this audit, it is argued, adds no value to the management. The industrial scene has changed since 1991. In a liberalised industrial economy, it is survival of the fittest. Cost consciousness and efficiency improvement are an essential offshoot of competition and there is no need for a legislation in this regard. No one in the industry today is against a sound costing system and efficiency audit. The objection is to the statutory imposition. The pith of the industry's argument is that they are already pursuing sound costing systems and efficiency audit than the statutorily imposed system. The statutory system implies an annual collection and collation of data which has no utility for day-to-day management control. Similarly, the Annual Cost Audit Report in the prescribed format serves no purpose in the discharge of managerial functions. Its utility is "zero", it is argued. Format matters In the era of liberalisation, the objective of the Government to make the industry cost conscious and efficient should be to merely insist on a sound costing and an effective reporting system. Let formats be left to the company concerned, choosing according to its needs and circumstances. Every professional management would welcome an expert to examine the efficiency of the control system. There should be no objection if the law also says so. The efficiency can be tested and reported in such periodicity as may be decided by the Government and industry. Expert cost accountants will also be put to test, to deliver the best in the interests of the company. In fact, some well-managed companies have called for and made use of periodic information selectively from the cost auditor on voluntary basis. Here again, the advantage of competition among professionals can be exploited by the company and a management auditor who performs will get preference. This audit will be of efficiency which, at present, does not exist in corporate statutory audit. Such an audit adds value to the management and will be welcomed.. The provisions regarding prescription of formats by bureaucrats and reporting to them must be dispensed with. Bereft of these, the provisions relating to management audit should be welcomed by all. An obvious question that the bureaucracy would pose at this point is: How should the Government monitor the effectiveness of these provisions? The only way is involvement of professionals and independent reporting to the Government. As regards the loss of confidentiality of operational data, it is possible to devise a simple reporting system confirming the existence of a sound costing system and management reporting for control. This system can cover more details if required without operational data. The industry and the Government, with the help of cost accountants, can work together in devising such a format. The argument that such a reporting is done by financial auditors under CARO is hogwash. There is a great deal of misreporting. Moreover, under professional statutes, they are not authorised to do this work. Perhaps, this alternative will address the legitimate objections of the industry. However, there are certain sections in government which require data in the existing cost audit formats for discharge of their statutory/regulatory functions. This is particularly relevant for excise authorities and tariff-fixing bodies. It is only proper that if they so require, such information should be called for in exercise of their powers under the relevant provisions of the respective statutes. If necessary, they can call for such information duly authenticated by independent professionals. Obviously, it is not the responsibility of Ministry of Company Affairs to facilitate these data for these authorities. In fact, they should extend the scope of such reporting to all sectors under their jurisdiction. For instance, why power companies alone should do cost audit, and not State electricity boards? Save the practitioners Any move to scrap the system rather than modify it according to the needs of the day would be like throwing the baby along with the bathtub. The Government has to also keep in view the fate of thousands of practitioners, especially the young men and women who have staked their careers to the profession. As of today there are more than 2,000 members of the professional body who have developed expertise in costing. . Their expertise and careers should not be jeopardised. By not being proactive enough in convincing industry that its services do add value, the profession has stunted its own growth. There is need for a balanced view in this matter. Totally scrapping cost audit or retaining the system in the present form are extreme positions that should be avoided. The Government, having jurisdiction over the profession, should look at how it can be made vibrant. A. R. Ramanathan (The author is a former Member, CLB and CERC.)
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