Latest draft rules issued by ministry outrage cost auditors

MUMBAI: The latest draft rules issued by the ministry of corporate affirs related to the cost records and audit mechanism could substantially curb the scope of the cost audit profession and have outraged its practitioners, who say their implementation will hurt company shareholders. 

The Institute of Cost Accountant of India (ICAI), set up under an Act of Parliament, has expressed deep concern and vowed to "leave no stone unturned" in seeking to make sure the draft isn't implemented. ET had first reported on August 12 that the government was considering a reduction in the scope of cost audits due to industry pressure. 

The draft rules curtail cost audits in three ways. First, the number of industries covered is reduced. "At present, a company engaged in production, processing, manufacturing, or mining activities is required to maintain cost records," said Suresh Chandra Mohanty, president, ICAI. "Moreover, all listed companies are required to maintain cost records. Cost audit is applicable to a company for which cost audit is ordered by the central government," he said. 

"The draft rules require only those companies that are operating in strategic sectors or in industries that are regulated by a sectoral regulator, or a ministry or department of central government or in some specified industries such as manufacturing of components and equipment being used by railways, minerals and ores. It also covers healthcare services and education services," Mohanty said. 

Secondly, the turnover and net worth threshold has been increased substantially. "The threshold has been increased from net worth of 5 crore to 500 crore and the threshold of turnover from the specified product is fixed at 100 crore," Mohanty said. 

Third, apart from the companies required to undergo cost audit, all others have been exempted from maintaining even cost accounting records. "Nearly 90% of the economic activity will be out of the purview of cost records and cost audit," said Dhananjay Joshi, a leading cost accountant and past president of ICAI. 

ICAI listed its opposition to the draft rules in a press release. "It is well established that managers act opportunistically and they take short-term view and benefit themselves even when the going is bad. In the absence of reliable cost accounting information, independent directors will not be able to assess whether the company is achieving optimal productivity of resources," ICAI said. "The reversal will hurt shareholders and other stakeholders." 

"It is noteworthy that when the MCA itself had appointed an expert group in 2008 and implemented its recommendations in 2011 and possibly the first audit report is filed only for the year 2012-2013 for most of the companies, MCA has taken a total U-turn," said Joshi. 

The implementation of the draft rules could jeopardise prospects of many who left other jobs to pursue cost accounting. Also, "the profession will not be able to attract talent and it will become weak. This will hurt all the stakeholders," ICAI said while terming the development as "de-facto withdrawal of recognition." The ministry said any changes will be based on feedback received. 

"The draft rules are in the public domain for comments and suggestions of stakeholders. As in case of other rules, a final call will be taken only in the light of the feedback received. In the circumstances any further comments on the issues are premature," said Naved Masood, secretary. The ministry has asked stakeholders to send comments on the draft rules by December 6. Mohanty said the ICAI will seek to ensure that the draft rules are modified before notification.