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Mandatory cost auditing norms may be revised
June, 21st 2007
Sensitive operational details of a large section of corporate India are likely to come under government scrutiny soon. The ministry of corporate affairs has started reviewing the way it orders mandatory cost audits on companies to optimise the coverage of each of the 44 sectors for which it has notified norms for keeping cost records.

In many sectors, cost audit data is used by the government for decisions related to pricing, excise duty, income-tax and in calculating the injury suffered by the domestic industry due to dumping. The audits also reveal the extent of efficiency and profitability of a company as well as the sector.

The move is to find out why some companies were missed out while audits were ordered. This would help the ministrys Cost Audit Branch (CAB) to determine if they too need to be audited. In January this year, CAB ordered cost audits of 12 oil companies at the request of the petroleum ministry to have an idea of the extent of under-realisation (sale of petroleum products below their cost price).

Last year, it had ordered cost audits on 70 electricity and 90 pharma companies, which form only a small part of the sectors concerned. Cost audits were ordered on drug makers in the wake of reports that astronomical trade margins exist in the sector. Comparing production cost with retail price would expose this. The other sectors covered include telecom, plantation, mining, chemicals and pharma, steel, engineering, textile, sugar, cement, tyre and motor vehicles.

Cost audits are ordered on specific companies in a sector that have a turnover of over Rs 10 crore. All manufacturing companies are expected to keep cost records as per rules notified by CAB. The audit covers areas such as quality control, raw material consumption, R&D expenses, royalty payments, fixed assets and depreciation.
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