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Government mandates cost audits for over 100 companies
December, 28th 2010

The government has mandated cost audits for over 100 companies, covering a host of sectors including pharmaceuticals , fertilisers , steel and petroleum . Cost audit, which is a system of government scrutiny into a company's production cost and profit margins, is currently mandated for only 44 products in sectors like manufacturing, mining and services.

The Cost Audit Branch (CAB), a department under the ministry of corporate affairs, in an order issued last week, has asked 115 companies to file their cost audit report for the year ending March 31, 2011. The list of companies includes names like Biocon , Bayer Pharmaceuticals, BASF India , Haldia Petrochemicals, Tata Steel and Steel Authority of India Ltd (SAIL).

The present list of companies, which also include many small and mid-cap companies as well, have been formed, on basis of recommendations made by sectoral regulators, in order to keep a track of the costing structure of these companies, said an official in the ministry of corporate affairs, without mentioning details about any firm in particular.

The present order has been passed under section 233B of the Companies Act, which gives the government an authority to call for such an audit if it considers it to be necessary. The government has the power to ask the registrar of companies to inspect the books of any company, if any discrepancy is noticed in the cost audit report.

Cost audit records comprise detailed records of materials, labour, utilities, overheads, depreciation, royalty, research and development expenses, incentives on exports, borrowing costs and inter-company transactions. The data is useful for companies to improve efficiency, while the government uses it for policy making.

The move to keep a close watch on how efficiently money is spent by these companies is significant considering government's uneasiness over the way companies charge for their products and services.

Cost audit provides the regulator an access to how a company manages its pricing scheme and can be an effective way to counter anti-competitive practices and cartelisation. Recently, civil aviation minister Praful Patel spoke on the need to fix airline tariff based on cost norms.

Experts have, however, opposed the government's basis to order cost audits on a selective basis. "The government should take a holistic view and not just ask companies on a selective basis," said Chandra Wadhwa, an expert on costing methods.

Cost records, as procured by the CAB, are on a regular basis passed on to various departments and regulators in the government for research and sectoral analysis. The intention to extend compulsory cost auditing to infrastructure companies has been incorporated in the Companies Bill, likely to be made into a law by the end of this fiscal.

An expert group has recommended that all companies whose turnover is more than Rs 50 crore should be mandated to maintain cost audit books. At present, companies engaged in only 44 products, including paper and sugar, need to get their accounts cost audited.

The Institute of Cost and Works Accountants of India (ICWAI) had earlier recommended compulsory cost audit for all industry, excepting for small companies less that Rs 50 crore turnover.

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