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A step in the right direction: Mandatory cost audit
May, 30th 2011

The Ministry of Corporate Affairs has issued two circulars in May 2011 making cost audit mandatory for some selected industries. All listed companies and companies with net worth exceeding Rs five crores or turnover exceeding Rs 20 crores, operating in any of the following industries, will be covered under mandatory cost audit effective from April 1, 2011: Bulk drugs, Formulations, Fertilisers, Sugar, Industrial alcohol, Electricity, Petroleum and Telecommunication. Similarly, all listed companies and companies with turnover exceeding Rs 100 crores, operating in any of the following industries will be covered under mandatory cost audit effective from April 1, 2011: Cement, Tyres and Tubes, Steel Plant, Steel Tubes and Pipes, Paper and Insecticides. This is a clear departure from the earlier government policy of directing cost audit of certain selected companies covered under Cost Accounting Record Rules issued from time to time by the government.

Many companies had opposed mandatory cost audit because they are reluctant to release sensitive cost information, which if gets leaked and reaches the competitor, might harm the interest of stakeholders as the companies might lose competitive advantage. Many oppose cost audit on the ground that such an audit does not add value to the company. It is heartening that the government has taken the right decision without succumbing to the pressure from companies.

The first concern of the companies cannot be wished away. Therefore, the government should address that concern adequately. It should explore mechanism to protect the interest of companies. One alternative is to direct the cost auditor to submit the cost audit report to the board of directors and the company should submit a compliance report to the government. The government or the regulator may call for the complete cost audit report, whenever required. This will protect the interest of companies while achieving the objective of taking India to the next maturity level in using management accounting tools.

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