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Keep cost audits One of the drawbacks with radical change is that it more often than not obliterates all that is associated with the past -...

Keep cost audits One of the drawbacks with radical change is that it more often than not obliterates all that is associated with the past – be it good, bad or indifferent. The recent recommendations of the Working Group on the Companies Act regarding the modification of the provisions relating to cost audit in companies seems to be another example of the triumph of revolution over reason.

The entire Companies Act is being redrafted to suit a more market driven system. While many of the changes envisaged are welcome and indeed, overdue, some seem to be a manifestation of change for its own sake rather than for overall economic development. And the cost audit seems to have been among the first casualties of this attempt to rework corporate law.

This is exceedingly ironic as the onset of liberalisation has if anything, only increased the importance of the cost audit. The audit which involves a stringent review of the cost records of a manufacturing enterprise not only helps to control costs of manufacture but also enables the companies to be efficient and develop as well as maintain competitive cost advantage. Not surprisingly, managements all over the world view cost audit as a management tool rather than as a cost verifying mechanism.

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The importance of cost accounting was acknowledged as far back as in 1965. The government subsequently expanded the scope of the audit section gradually by increasing the number of industries covered under the section and by making the cost audit a biannual and subsequently, annual event. It is worth noting that these measures were instituted as recently in 1994, when the economic reform process was well under way. Cost audit, contributes in several other ways to the development of a healthy and equitable economy, all of which make its projected removal all the more puzzling. The WTO Factor: In the context of international trade and the liberalised Indian economy it is essential to keep in mind the WTO agreement to which India is a signatory. The provisions relating to anti dumping are of special significance in the context of cost accounting. The determination of normal value, domestic price, quantum of injury etc. all require cost information. Manufacturers in the developed world are so well equipped with data that they obtain speedy relief under WTO while benefitting from the lack of data available in developing countries. To be truly competitive Indian companies must maintain appropriate costing data.

Protecting the Indian Investor: SEBI has issued guidelines for observance by the companies going in for capital issues. Disclosure provisions have been provided in the guidelines. If these disclosure provisions are appropriately linked with cost accounting records, investors will be protected. They would then get authentic information and would not be carried away by doctored figures.

Effective Revenue Administration: recognising the significance of the cost audit concept, the govt has recently introduced special audit by cost accountants under excise laws. Similarly government has also expressed the need to use cost audit reports for administering duty drawback schemes. It is true that every revolution has its victims. But it would not make the suppression of the cost audit any less tragic or senseless.

The author is the secretary of the Institute of Cost & Work Accountants of India, at Calcutta.