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Cost Audit Awareness in India

I came across a discussion topic by Murari Limaye on cma india discussion board with a request to brain storm on it. The topic is very interesting and reproduce the questions below:

The points initialy came in my mind are...

1. We have to prove that the Cost Audit is necessary because it helps to Government, Industries,Stake holders.
2. What are the advantages of Cost Audit to these institutes?
3. Are the reports are used by the Government to control the prices that we do not know as it is kept secret.
4. If required we have to give presentation on how to use the Cost Audit Report para to para.

5. Is the current Cost Audit report is too large and unrequired information is to be removed?
6. Is this report is to be given to shareholders also?
7. Why all the manufacturing industries and service industries are not covered for cost record maintainance as well as cost Audit Report? and so on.....


I have never been a supporter of too much controls on business. But at the same time control should exist so that all the stakeholders are protected. Take a simple case how controls are waste of time for you as a person. You come from US to India and land on airport. You need to convert US dollars to Rupees and you have 50 $ 10 notes. If you have exchanged in any US airport, it would have taken you maximum 3 minutes on the counter but the same process will take more than 15 minutes. What would happen, if you 5th person in the queue.

The reason, you have to write all the currency numbers that you submit for exchange and then you are going to get Indian Rupees for it. Sheer waste or time and energy... That is what is control all about.

My thoughts on Cost & Management Accounting practises and way ahead is as follows:

Dear Murari,

My thoughts on the subject are :

  • Cost Audit and Management Accounting are two different aspect and we have been stressing persistently on Cost Audit and its importance rather Management Accounting. The stakeholders of information on Cost Audit are two few ie. govt. authorities and practising cost accountants whereas the management accounting will be the Directors, all levels of management of the company.
  • The institute and the members have to create awareness that good management accounting practises and disclosures in Annual Statement of that company gives a confidence to their stakeholders viz. Shareholders, Customers, Vendors, Govt. Authorities that their interests are safeguarded. This can equated to Audit Committee and Internal Audit disclosures to be the made in Annual Reports. Our institute should pursue to get that included as a legal provision of healthy practises followed by the companies and the directors should comment in their report. This legal provision in direction will enlarge the scope of management accounting in India and will gear up the companies to be competitive.
  • ICWAI has come up with two few standards. This may leaves scope for creative accounting practises. In service industry, focus is on labour accounting i.e. accounting of utilisation of time. Are there any standards how to show them or record them ?
  • In my opinion, the Cost Audit Report will be of no interest to shareholder since they are more bothered about dividends and what is the prospect of the investment.
  • You are quite right in pointing out that Cost Accounting rules should be available for service industries. ICWAI has to come with drafts and discussion papers on Cost & Management Rules/Records/Practises on the industries that are not covered by Cost Accounting Rules. It is always good to have something in place and it is voluntary for the companies to follow.
I have stressed earlier in the discussions in yahoogroups that ICWAI has to come up with the task force to encourage popular accounting packages in India to support Cost Accounting Record Rules and advice them wherever necessary. Accredit some of the software packages that the companies can get their reports/records as per Cost Accounting Rules. This will help to penetrate cost accounting practises in small and medium sized companies in India.

India is a very large market. So take a bite at a time

Regards,

Santosh Puthran

AICWA





Comments

ravi said…
This could be quite interesting for all of u to appreciate the fact that Cost audit is in the interest of globalised economic environment.
Cost Audit –Here to stay in a Global perspective.
Maintenance of Cost records and Audit of the same has been in India since long and
recognized in the companies act 1956 by an amendment in 1965.The main intention
of the legislature was laying emphasis on controlling cost and setting up an
administrative pricing mechanism to protect the interest of the society.
Its emphasis is manifold unlike maintenance of financial records and its audit year on
year basis. While financial accountants addresses the needs of owner partially they
seldom address the interests of the society at large. In this context Maintenance of cost
records through a compliance mechanism has to travel a longway since the same is not
yet compulsory across board among companies(exemption to small scale sector)across
sectors(services and agriculture still to take up)Regularity(audit depends on order from
CAB even when Cost records maintenance is made compulsory)Accounts not certified by
qualified cost accountant(where Audit is not ordered ).
In the above back drop let us discuss few lines about the hype created in the Industry
circle about abolition of cost audit in global perspective.
First of all one must understand that maintenance of records reflecting cost of production
and services is the primary need for any business and in the global scenario it is all the
more vital .Unlike formatted financial accounts, which lay emphasis on recording of
transaction in a double entry mode, Cost accounts concentrate on business process
through a planning mechanism(budget) setting up of standards for physical and financial
incurrence(thus an inclusive mechanism of financial and non-financial measure) and
records transaction in a double entry mode to reflect a true and fair view for business
sustenance and growth.Its vision covers the interests of all internal and external
stakeholder and thus all encompassing.
Cost accounting is, State of Economy-Neutral, in the sense it does not simply focus on
recording transactions to claim such a neutrality while it addresses issues of economic
prosperity, its sustenance, through resource planning and overall growth
perspective(through enabling business process re-engineering) in the global arena.
Be it Capitalist Mode where Money is driving growth{(Optimising the yield from
investment is primary concern through internal(Process efficiency ) and
external(Delivery end-to-end and Income maximization) re-engineering)}.Be it Socialist
which lay emphasis on Planning process for resource allocation and egalitarian approach
to push a sustainable growth forward.
It is sector neutral since there is a longstanding and a reliable relation between money and
its exchange(Goods and services) and Cost is relational parameter for measuring value to
a business.
It impacts business cycle and prolongs the process, if not , completely plug the process
of concentration of economic power by checking the system and allowing efficient
process to flow thereby protecting the stakeholders from vagaries of business cycle.
It is something related to good governance and fair practices in “business and
governance of the economy “and can be defined for all the socio-economic setup and is a
very dynamic tool for measuring growth and efficiency.
The relevance of the stakeholders is better addressed in a liberalized and global setup
than a controlled setup and the relevance of cost accounting in the emerging world order
can only be better emphasized by looking into the global consumer and business
perspective. Infact the global scenario has complicated the economics of scale and
resource consumption specially, the speed of delivery, that we need to fall back on cost
accounting as addressing the whole range of issues that are the expectation of community
of nations.
Cost accounting is” Forms of business” neutral in that it addresses the core issues of
Value engineering for recording of transaction and has the business perspective, rather
than simply counting numbers it grows numbers and directs a sustainable growth in the
economy.
In the light of what has been stated above it is highly relevant and utmost imperative to
infuse the culture of recording transaction in the cost accounting mode transcending
business territories , economic model adopted by the state and the forms of business and
also in the governance of the economy.
In this context Indian economy had made a good beginning way back in 1965 and if the
realization of social-cost benefit is percolated down the line and addresses individual
citizens perspective in the society that is well geared in a political setup where
individual citizen has the right of choice to elect the representative to govern the society
and the resources, which is of common concern ,and the business model and any
economic activity is, that of exploitation of resources owned in equal measure of right
and opportunity by every citizen of India, then the agency factor comes alive for any
exploitors who come to the forefront of such activity and hence they are liable not only to
their business interest but also to the community interest and in that Cost accounting is a
potent tool of measurement. The object of competition and free movement of goods and
services is to plug inefficiency in global perspective and improve efficient delivery model
and these can seldom be addressed by financial statements of Profit and loss account
and balance sheet.
Having discussed at length of the requirement of cost accounting in the global economic
scenario we will now deal with what can be the way ahead from the stakeholders
perspective. These are recommendations to march ahead.
1.IFAC a world body of accountants which has yet far concentrated on the management
accounting issues should be geared with the might of Management accounting bodies to
come up with Statements of management accounting practice that is “economy, sector
and business forms neutral” which addresses the triple bottom line issues in global
perspective.
2.ICWAI in its interest and in the interest of stakeholders at large become proactive in
the delivery model (end to end) to percolate cost consciousness and other management
accounting related issues. It should come with policy guidelines that will push forward
reforms in accounting practices in the Indian context. It should also ensure quality man
power is made available in five years from now positioning the management accounting
model where the demand could be anywhere between 500000 to 1000000.
3.The GOI should become proactive and also come with a policy paper on the Inclusive
accounting aspect(financial and management accounting) addressing socio-economic
model of sustainable growth. It should re-position the role of Management accountant
as a Public accountants on par with Chartered accountants in all spheres of economic
activity and encourage them to participate in the process of maintenance of accounts and
audit in all forms of business and in government specially Taxation and budgeting
aspect.It should also shift away from the belief that ICAI is be all and end all of
Accounting and auditing profession.
4.Various economic legislation should define the role of Management accountant
clearly addressing the needs of our society.
Specific issues that needs to be re looked and amendments sought are:
1.Companies act should make a provision for Compulsory maintenance of cost records
for all businesses registered with it and allow audit on par with Statutory financial audit.
The cost auditor should submit its report to the Board and where after a gist can be
presented before the AGM.
2.All other forms of business where specific legislation is available should have
compulsory maintenance of cost records as a mandatory provision.
3.TAX departments should extensively use the services of Cost and Management
accountants in the process of collection of tax revenue.A process of auditing cost records
should be in place to ascertain exact cost of transaction and true determination of Income.
4.Government should recognize the true potential of Cost and management accountants
and employ them under ICAS or in consultancy assignments as an expert in social-cost
benefit analysis. The services should also be utilized in various regulatory frame work
that is coming up in administrative ministries for determination of fair price and
efficiency parameters.
CMA.R.Veeraraghavan

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