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Cost accounting relevant in all scenarios
February, 02nd 2007

Is cost audit becoming redundant in a liberalised market economy? Dhananjay Vishnu Joshi , president, the Institute of Cost and Works Accountants of India (ICWAI), believes their vocation will remain relevant as a tool to ensure best use of productive resources, especially since markets are rarely perfect. . Excerpts:

What is the need for cost audit in a liberalised market economy?

Cost accounting and cost audit are necessary for efficient resource utilisation and for monitoring and improving the efficiency of organisations. These very objectives are fundamental and are not related to the size, type, capital, and stage of economy or ownership of capital. In a liberalised market scenario, business sustainability depends on cost and competitiveness. The pricing decisions are very much related the cost. Liberalisation also does not assure perfect competition as is evident in India.

Hence the perception that the customer is the king is not always valid. In fact, the state has the responsibility to protect the interest of consumers, investors and other stakeholders. In a liberalised economy, the best use of productive resources is the main challenge and cost audit addresses it. One must make a distinction between control and regulation. Cost audit is to be viewed as a regulatory mechanism. For regulators in sectors such as power, telecommunication and insurance, cost records is the basic requirement. It is an effective tool to examine tax and duty evasion, quantitative mismatches and overpricing by monopoly producers.

Will cost audit compromise on the confidentiality of sensitive business information?

With the implementation of e-governance programme, cost audit reports are submitted to the government in e-form. It is not a public document, nor does it include information which is of confidential in nature, like drawings and designs and formulations which form part of the intellectual property. Cost information of various industries is already available from other sources. The compilation of cost statements and the flow of information in the report gives a lot of flexibility to protect the confidential information. Cost accounting and audit is not a threat to trade secrets. Mere knowledge of cost composition of a rival company cannot lead to your capturing the market. In internet era, access to huge databases on almost all product technologies, processes and input costs, derivation of costs of a particular product or service can hardly remain a secret. No company would lose its edge if the rival comes to know of its costs. They may, if the rival comes to know of their technology.
Does cost audit increase the cost of compliance?

There are mixed views. Those who consider the system only as compliance sees the glass as half empty. But there are industries, which are extensively using this tool as a performance evaluator and have derived both intangible and tangible benefits, which outweigh the cost. It may be noted that the information and records are already available with the auditee. The system only requires its proper and logical assimilation to bring it in a suitable, convenient and meaningful format. The tangible costs are meager.

Who resists cost audit and why?

It is our experience that there is, in fact, appreciation of cost audit reports at board level. The top management gets authentic, reliable value-added information that is useful for decision making. At times, many aspects covered in the cost audit report are not brought to the notice of the Board. We have often seen top management questioning the line below on the observations and suggestions made by the cost auditors and why suggestions could not be implemented earlier?

Many areas of wastages, inefficiencies are identified which are desired by the Board. However, due to very busy schedule of the Board members, the time slot is not adequate to appreciate the cost audit report which leads to misconceptions and thereby undermining the importance and utility of the system. The views may be getting influenced by the approach of the line managers to hush up the real issues. One of the major irritants to the industry is the feeling that their company is subject to cost audit whereas a large number of their competitors are not. This is due to the fact that the record maintenance is applicable to 44 industries, which covers almost 50,000 companies whereas cost audit orders have been issued only for 2,000-odd companies. This leads to doubt in the minds of industry captains why there is no cost audit of their competitors.

How can cost audit aid competitiveness and be justified in a globalised scenario?

Maintaining cost records in a systematic manner is the first stage for correct determination of the cost. The cost audit system brings in organised and disciplined mechanism, which gets validated. The efficiency and performance gets evaluated and the areas of wastages, losses, inefficiencies, etc. are identified. Cost savings have a tremendous potential, which alone brings competitiveness. No doubt gaining competitiveness is a summation of various factors and contributors, but knowing your cost correctly is of prime significance. This basic rationale of cost audit along with protecting the interest of consumers, investors, other internal and external stakeholders etc. remain at the nucleus of cost audit. Any economic scenario, globalised or otherwise, can not undermine its justification.


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