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Panel to recast cost audit setup
April, 17th 2008

The government is all set to recast its cost audit frameworkthe system of scrutinising cost of production and profit margins of individual companies even as spiralling inflation is drawing policymakers attention to companies in sectors like cement and steel.

The government has set up a 7-member expert panel headed by a senior official attached to the cost audit branch of the ministry of corporate affairs to advise on how to rework mandatory cost audits. Cost audit allows the government to access sensitive operational details such as cost of production, raw material consumption, capacity utilisation, quality control, research expenses and royalty payments. The panel is expected to give its report by September.

With commodity prices shooting up to record levels, concerns about low efficiency and suspected cartelisation have been expressed in industries like cement and steel. The panel, therefore, is unlikely to recommend dropping such sensitive sectors from the purview of cost auditing. Besides, certain ministries have recommended that the scope of cost audit should be expanded to companies in sectors like defence production. The panel might, however, recommend a principle-based approach of requiring companies to maintain cost records, but not requiring the law to specify how to go about it, sources said.

It might also recommend excluding a large number of small companies from the purview of mandatory cost auditing while suggesting non-discriminatory audit of bigger ones.

Cost data is becoming relevant in new areas like adjudicating on allegations of anti-competitive practices such as predatory pricing. It is also useful to detect tax evasion and to make policy decisions related to pricing. Under the competition law, cost data of a company is vital in determining whether it is guilty of predatory pricing.

Without it, it is difficult to ascertain whether a company is selling below its cost of production to force competitors out of the market. The government had earlier considered retaining only sectors producing essential commodities under cost auditing but has decided to get the issue examined in detail by an expert committee.

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