Cost audits are a nuisance

19 jan 2014

The Centre has come out with the draft Companies (Cost Records and Cost Audit) Rules, 2013, which proposes to mandate cost audit for specific sectors.

The proposed rules are a welcome change from the Cost Audit Order of November 6, 2012, which covered all sectors and was legally questionable.

In fact, prior to the November 2012 notification, the government had always applied the principle of cost audits to select sectors based on parameters such as sectors of strategic national importance, sectors of administrative pricing control and sectors where regulators exist. But a blanket mandate was something surprising.

Cost audits are not a new phenomenon. Methods and techniques of cost accounting and audit of cost accounts in India can be traced back to 1925 when a large number of firms were awarded contracts by the government on a cost-plus basis, where the government verified and investigated the cost structure of such firms. During the late 1940s and 1950s — termed the golden era of industrialisation — the profession of cost accounting contributed immensely.

A control tool

Clearly, what began as a mere exercise in cost estimation later developed into a movement for efficiency and optimum utilisation of scarce resources.

Post-independence India necessitated concessions and facilities to entrepreneurs to establish industrial undertakings.

Therefore, services such as power and electricity were provided at concessional rates, and financial institutions too provided liberal funds. The flipside was that there were very few industrial groups and it was a suppliers market in most places. This resulted in few choices for consumers.

Additionally, often there were complaints of excessive pricing, which encouraged smuggling and other malpractices such as under-invoicing of imports to save custom duties or over-invoicing of exports to get higher export benefits. The high prices were often justified citing higher indigenous cost of production. Thus the government felt the need for price controls.

Initially, cost audit was merely a tool for ‘price control mechanism’ for consumer and infrastructure industries in India.

The main objective of cost audit — when statutorily introduced under the provisions of Companies Act, 1956 with effect from October 1965 — was to meet the government requirements for regulating the price mechanism in core industries such as cement, sugar, textiles and consumer industries such as Vanaspati formulations and automobiles.

A new era

We must acknowledge that times have changed and there must be an environment that supports competitiveness and growth.

The biggest weakness in India’s efforts to revive the economy and attain high growth is the lack of robust growth in manufacturing. It is vital to note that the manufacturing sector has grown at a very slow pace in the past five decades.

What is even glaring is that if we exclude the micro, small and medium enterprises, its size becomes much smaller. Indeed, our efforts should be directed to help this sector grow by removing all impediments to make growth possible.

Further, we must appreciate that unlike the mid-20th century when the imposition of cost audit was the need of the hour, post-1991, the Indian economy has opened up to the world with integration happening in several spheres. Therefore, what is required is easing up of procedures in India, an issue which is being spoken about a lot these days, especially after the poor ranking that India has received in the World Bank’s Ease of Doing Business Report.

Make it easy

This led to the setting up of the Damodaran Committee, which submitted its recommendations in September 2013. The report highlighted the need for legal reforms, regulatory architecture and boosting the efficacy of regulatory processes. Undoubtedly, the ease of doing business needs to be complimented with adequate checks and balances.

India has a robust legal system, which already addresses matters relating to fair competition, transfer pricing and anti-dumping norms under the WTO.

In the end, it is for the government to create an enabling environment where the country is seen as a destination which is progressive, competitive and easy to do business in.

I am sure that the corporate affairs ministry will take appropriate note of the stakeholder suggestions while notifying the final Cost Rules.

(The author is member, Ficci-Cascade (Committee Against Smuggling and Counterfeiting Activities Destroying the Economy))