The Expert Group, appointed by the Ministry of Corporate Affairs, to review the Cost Accounting Record Rules and Cost Audit Report Rules observes that maintenance of appropriate cost accounting records by firms and effective cost audit will contribute to improving the competitiveness of the Indian industry. Therefore, it recommends replacement of the present system of mandating maintenance of cost records for select industries by a law that will require all companies to maintain cost records.
At present 44 industries are covered under Cost Accounting Record Rules. The Expert Group observes that application of Cost Accounting Report Rules selectively is not appropriate. Similarly, the Expert Group has recommended that the present system of ordering cost audit in select companies that operate in any of the industries that are required by law to maintain cost accounting records should be replaced by a law that will mandate cost audit in every company on a regular basis.
A question might arise that if maintenance of cost records and use of cost and revenue data in planning and control, and measurement of productivity improves the competitiveness of a firm, why companies do not maintain the cost records voluntarily. Why should the government mandate companies to maintain costing records. The Expert Group, like many others, believe that India is yet to reach that level of maturity where every player in the economy develops necessary self-disciplinary mechanism to achieve the objectives of the whole economy as well as those of stakeholders.
Therefore, government intervention is required to introduce systems that will optimise productivity of resources. Some may argue that the Indian industry is mature enough to develop self-discipline and therefore, market should be allowed to play the dominant role without government interference. We may continue to debate on this issue, but the fact remains that efficient allocation of resources requires support of a cost accounting system tat collates cost and revenue data and presents information for use by managers in planning and control.
Therefore, if the government accepts the recommendation of the Expert Group and introduces compulsory maintenance of cost records and regular cost audit in all the companies, it should not be viewed as bureaucratic intervention.
Cost audit should be viewed as an instrument for ‘continuous improvement’. It is akin to ‘efficiency audit’. Cost audit aims to provide an assurance to the management and the government that the company is maintaining appropriate cost records as prescribed by law and to identify waste of resources, if any. Thus, it identifies processes and activities where improvements are necessary to optimise the productivity of resources. Cost audit report provides useful insights into the weaknesses in processes and activities and also provides inputs in formulating plans for continuous improvement in utilisation of resources.
Cost audit is not new in India. Cost audit was introduced in the year 1965 with a social purpose. In a controlled economy where the government restricted the entry of large number of companies in a particular industry through licensing system, the government had to ensure that companies were not profiteering. Another objective was to monitor the efficiency in utilisation of scarce resources.
Many hold the opinion that the abolition of the licensing system and restructuring of the economic system have made the cost audit irrelevant. But that contention is not correct. It is true that the context has changed and the government does not need to use cost audit as an instrument of monitoring and control. In the change context the cost audit serves a different purpose. Cost audit is still relevant as a mechanism to provide assurance about the integrity of the cost information to regulators and government departments which use cost data from companies in decision making such as fixation of tariff or levy of exciseduty in certain circumstances.
More importantly, cost audit report will provide information useful in improving the productivity of resources. However, the approach of the management and the cost auditor towards cost audit should change to make the cost audit effective. The management should not perceive cost audit as a necessary evil and the cost auditor should not consider audit as a mechanical activity. The cost auditor should adopt innovative approach to add value to the audit report and the management should appreciate the usefulness of the cost audit. Let us hope that this change will occur.
The Expert Group has recommended that the Institute of Cost and Works Accountants of India should issue cost accounting standards (CAS) to bring uniformity and consistency in cost accounting practices across firms.
Although cost accounting lexicon and practices evolved over past 100 years or more, there are no globally accepted cost accounting standards. There is no concept similar to generally accepted accounting principles (GAAP). Cost accounting is always perceived as a support system that provides cost and revenue information to management for planning and control. Thus output of a cost accounting system is for internal use. Companies are quite reluctant to share cost information with outsiders including investors. Managers believe that sharing of cost information with outsiders adversely affects the competitive advantage that the firm enjoys in the market place.
It is often argued that there is no need for generally accepted cost accounting principles (GACAP) because reports generated by a cost accounting system are targeted to managers, who are internal to the firm. The need for comparability of cost reports generated by different companies does not arise and hence, there is no need for GACAP. This argument is not valid. Lack of uniformity and consistency in cost accounting practices and in presentation of cost statements makes decision making by regulators and government difficult. Therefore, there is need for GACAP. Moreover GACAP will improve the average standard of the cost accounting discipline.
In February 2009, for the first time, ICWAI has made CAS mandatory. At the first stage six CASs have been made mandatory effective from April 1, 2010. ICWAI has an ambitious plan to issue 39 CASs. At present there is no statutory backing to CAS. Therefore, it is mandatory only for cost auditors. In case of non-compliance by a company, the cost auditor should qualify the cost audit report.
It is expected that the government would take cognizance of the need for a set of GACAP and would make the cost accounting standards mandatory. Government took 30 years to provide statutory backing to accounting standards being issued by the Institute of Chartered Accountants of India. Let us hope that the government will not take that much time to provide statutory backing to CAS.
