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Cost audit may be must for core cos
February, 23rd 2009

The government may examine the cost of production and profit margins of public and private sector companies building highways, airports, container terminals, ports and other infrastructure projects by bringing them under compulsory cost auditing, a move aimed at hiking efficiency levels in the crucial sector.

Cost audit is a system of government scrutiny of production cost and profit margins now applicable for 44 manufacturing, mining and service sectors. As per the plan, infrastructure developers will have to keep detailed records of production cost and submit audit reports of the details as and when the government asks for them, said a government official, who asked not to be named.

The move to keep a close watch on how efficiently money is spent by infrastructure companies is significant considering the relatively easy credit availability and relaxations granted to the sector in recent months to fire up economic activity in the country.

Besides spending Rs 20,000 crore more than originally budgeted to build roads, houses, urban facilities and irrigation network, the government is raising funds from the market through tax-free bonds to facilitate long-term loans to infrastructure projects.

Through tax-free bonds, the government is supporting projects of a total cost of Rs 1,00,000 crore jointly executed by government and private developers. RBI also allowed developers of integrated townships to borrow from abroad as part of the second economic stimulus package announced on January 2. For government-private projects, the government gives up to 20% of the total project cost to make them viable.

The intention to extend compulsory cost auditing to infrastructure companies has been incorporated in the Companies Bill, 2008, which is being examined by a parliamentary panel before it is sent back to Parliament for clearance, said an official of the ministry of corporate affairs, who asked not to be named.

The Bill also proposed to give freedom to the board of directors of companies to appoint auditors with shareholder approval. Now, government approval is required for the appointment of cost auditors.

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 transaction. The data is useful for companies to improve efficiency while government uses it for policy-making.

Besides bringing infrastructure under the ambit of cost auditing, the ministry is also planning to recast the format of cost records to be maintained, for which it is expected to invite public suggestions soon. The Institute of Costs and Works Accountants, the regulator of cost auditors, recently submitted a concept paper to the government in this regard.

The records of production have to be maintained by any class of companies engaged in production, processing, manufacturing or mining activities except the small-scale industries with turnover less than Rs 10 crore. The government has the power to ask the registrar of companies to inspect the books of a company if any discrepancy is noticed in the report.

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